Functional Form in Regression Models of Tobin's q

Abstract

The Box-Cox transformation is used to compare alternative functional forms of market value equations. Based on evidence from a panel of 480 publicly-traded U.S. manufacturing companies and two additional data sets used previously in the literature, the semilog form of a Tobin's q equation is found to be strongly preferred to the commonly estimated linear form. The authors provide illustrations in which inferences can be affected by the choice of functional form. Copyright 1993 by MIT Press.

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