A re‐examination of the q theory of investment using u.s. firm data

Abstract

Abstract Investment models based on Tobin's q are theoretically appealing, but they have been an empirical disappointment when applied to aggregate time‐series data. This paper explores two potential explanations for the poor empirical performance of q investment models, problems arising from aggregation and imperfect competition. The results suggest that aggregation is responsible for spurious evidence of dynamic misspecification and at least partially responsible for an upward bias in estimated adjustment costs. The evidence also suggests that imperfect competition in output markets may have an effect on the investment behaviour of some firms.

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