Excess Capacity, Marginal q, and Corporate Investment

Gustavo Grullon and David L. Ikenberry

Journal of Finance, 2025, vol. 80, issue 3, 1533-1592

Abstract: Theory posits that when managers anticipate excess capacity, average q becomes a biased estimator of marginal q as the potential for underutilizing new capital reduces the marginal benefit of investing. After correcting for this source of measurement error, the explanatory power of Tobin's q substantially improves in time‐series and cross‐sectional regressions as well as in out‐of‐sample tests. These findings, together with a secular erosion in capacity utilization, help explain why corporate investment rates have been declining for decades despite average q increasing significantly. Our analysis indicates that economic rigidities have contributed to the persistent erosion in capacity utilization.

Date: 2025
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https://doi.org/10.1111/jofi.13439

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:80:y:2025:i:3:p:1533-1592

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