The Dynamics of Tobin’s q

Giovanni Puopolo

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: In this paper I propose a general-equilibrium model with proportional adjustment costs and industry-specific capital to study the firm migration phenomenon across market-to-book ratio. In my model, investors’ desire to diversify their portfolios and investment frictions generate a mean-reverting dynamics of Tobin’s q consistent with the probabilities of migration found in the data, and a nonlinear pattern in the conditional volatility of Tobin’s q. In addition, since firms’ market-to-book ratios are function of the state of the economy and contain information about stock returns, stock prices inherit these properties, yielding asset-pricing implications in line with the empirical evidence, namely the value premium and a non-monotone relationship between the volatility of stock returns and the Tobin’s q.

Keywords: Tobin’s q; Investment; General equilibrium; Firm migration; Cross-section of returns (search for similar items in EconPapers)
JEL-codes: D21 D24 D51 D92 G12 (search for similar items in EconPapers)
Date: 2011-05-31, Revised 2016-05-10
New Economics Papers: this item is included in nep-dge
Note: A previous version of the paper was titled "Firm Migration and Stock Returns".
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Forthcoming in the Review of Finance

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http://www.csef.it/WP/wp286.pdf (application/pdf)

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Journal Article: The Dynamics of Tobin’s Q (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:286

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