The Dynamics of Tobin’s Q
Giovanni Puopolo ()
Review of Finance, 2017, vol. 21, issue 5, 2075-2102
In this article, 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 non-linear 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: G12 D92 D51 D21 D24 (search for similar items in EconPapers)
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Working Paper: The Dynamics of Tobin’s q (2016)
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