RETURNS TO EQUITY, INVESTMENT AND Q: EVIDENCE FROM THE UK

Simon Price and Christoph Schleicher

Manchester School, 2005, vol. 73, issue s1, 32-57

Abstract: Conventional wisdom has it that Tobin's Q cannot help explain aggregate investment. However, the standard linearized present‐value asset price decomposition suggests that it should be able to predict other variables, such as stock returns. Using a new data set for the UK, we find that Q has strong predictive power for debt accumulation, stock returns and UK business investment. The correctly signed results on both returns and investment appear to be robust, and are supported by the commonly used and bootstrapped standard error corrections, as well as recently developed asymptotic corrections.

Date: 2005
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