 Why did the q theory of investment start working?Daniel Andrei, William Mann and Nathalie Moyen Journal of Financial Economics, 2019, vol. 133, issue 2, 251-272 Abstract: We show that the relation between aggregate investment and Tobin’s q has become remarkably tight in recent years, contrasting with earlier times. We connect this change with the growing empirical dispersion in Tobin’s q, which we show both in the cross-section and the time series. To study the source of this dispersion, we augment a standard investment model with two distinct mechanisms related to firms’ research activities: innovations and learning. Both innovation jumps in cash flows and the frequent updating of beliefs about future cash flows endogenously amplify volatility in the firm’s value function. Perhaps counterintuitively, the investment-q regression works better for research-intensive industries, a growing segment of the economy, despite their greater stock of intangible assets. We confirm the model’s predictions in the data, and we disentangle the results from measurement error in q. Keywords: Investment; Tobin’s q; Research and development; Innovation; Learning (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:133:y:2019:i:2:p:251-272 DOI: 10.1016/j.jfineco.2019.03.007 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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