Beyond Q: Investment without Asset Prices
London Business School
Joao F. Gomes
The Wharton School
January 22, 2013
AFA 2013 San Diego Meetings Paper
Studies of corporate investment behavior often rely on measures of Tobin's Q to control for "fundamental" determinants of investment. We show however that Q bears only a weak relation to optimal investment under all but very stringent assumptions about the nature of markets and technologies. As a result it is always better to use the underlying state variables and estimate the optimal policy function directly. Importantly, state variables, like size and sales, are easier to measure than marginal Q, and even a low order polynomial approximation to the optimal policy provides a superior description of investment than standard Q measures.
Number of Pages in PDF File: 43
Keywords: Investment, Policy Functions, State Variablesworking papers series
Date posted: March 20, 2012 ; Last revised: July 25, 2013
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