Using Patent Capital to Estimate Tobin’s Q

Michael Woeppel

Journal of Financial and Quantitative Analysis, 2022, vol. 57, issue 8, 2929-2967

Abstract: I construct a new proxy for Tobin’s Q that incorporates the replacement cost of patent capital. This proxy, which I call patent Q, explains up to 62% more variation in investment than other proxies for Q. Furthermore, investment is more sensitive to patent Q than to other proxies for Q. Although investment is predicted more accurately by, and is more sensitive to, patent Q, controlling for patent Q leads to relatively larger, not smaller, cash flow coefficients. All results are stronger in subsamples with more patent capital. Overall, patent Q strengthens the historically weak investment–Q relation.

Date: 2022
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