Abstract

http://ssrn.com/abstract=2024716
 
 

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Beyond Q: Investment without Asset Prices


Vito Gala


The Wharton School

Joao F. Gomes


The Wharton School

January 22, 2013

AFA 2013 San Diego Meetings Paper

Abstract:     
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 Variables

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Date posted: March 20, 2012 ; Last revised: July 25, 2013

Suggested Citation

Gala, Vito and Gomes, Joao F., Beyond Q: Investment without Asset Prices (January 22, 2013). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2024716 or http://dx.doi.org/10.2139/ssrn.2024716

Contact Information

Vito D. Gala
The Wharton School ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
João F. Gomes (Contact Author)
The Wharton School ( email )
2329 SH-DH
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3666 (Phone)
215-898-6200 (Fax)
HOME PAGE: http://https://fnce.wharton.upenn.edu/profile/930/overview

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