What Can We Learn About the Sensitivity of Investment to Stock Prices with a Better Measure of Tobin's q?

William Gentry and Christopher J. Mayer

No 2003-03, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: This paper examines the responsiveness of investment to q (i.e., the ratio of a firm's market value to the replacement cost of its assets) using data on a unique type of firm: Real Estate Investment Trusts (REITs). For REITs, we have high quality estimates of the net asset value of the firm that we use to create relatively accurate measures of Tobin's q. In addition, REITs have institutional features that mitigate some of the complications faced by previous studies. We have three main results. First, there is little evidence of a statistical link between REIT investment and a traditional accounting-based measure of q. Second, REIT investment is highly sensitive to estimates of q that are based on analysts' appraisals of asset value. A REIT whose NAV-based q ratio rises from 1.0 to 1.1 will increase its assets by 4.3 percent in the next year. Third, the difference between the appraisal-based measure of q and the traditional accounting based measure typically increases with the age of the firm's assets and varies across types of properties. These results suggest that measurement error in q can lead to appreciable downward biases in investment sensitivities, even in an industry that seems to meet many of the assumptions in Tobin's original paper, but that Tobin's investment model performs well with a better measure of q.

Keywords: Investment; Tobin's q; Real Estate Investment Trusts (search for similar items in EconPapers)
JEL-codes: E22 G31 (search for similar items in EconPapers)
Date: 2003-07
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://web.williams.edu/Economics/wp/gentryREIT-I ... ry-Mayer-july_03.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wil:wileco:2003-03

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Department of Economics Working Papers from Department of Economics, Williams College Williamstown, MA 01267. Contact information at EDIRC.
Bibliographic data for series maintained by Greg Phelan ().