Marginal Q, Tobin’s Q, Cash Fow and Investment
Klaus Peter Gugler
Vienna University of Economics and Business Administration; European Corporate Governance Institute (ECGI)
Dennis C. Mueller
University of Vienna - Center for Business Studies - Department of Economics
B. Burcin Yurtoglu
WHU - Otto Beisheim School of Management
Southern Economic Journal, Vol. 70, No. 3, 2003
Many studies of the determinants of investment use Tobin's q to control for the investment opportunities of a firm. Tobin’s q roughly measures the average return on a firm’s capital anticipated by the market. More relevant for investment decisions, however, is the marginal return on capital. In this paper we estimate investment and R&D equations using a measure of marginal q. We use marginal q to identify the existence of cash constraints and managerial discretion, and as a separate explanatory variable. For a sample of 562 U.S. firms observed over the 1977-1996 period we present evidence confirming the existence of both cash constraints in some companies and managerial discretion in others.
Keywords: Investment, Cash Flow, Tobin’s q, Marginal q, Asymmetric Information, Managerial Discretion
JEL Classification: G34, L21Accepted Paper Series
Date posted: May 16, 2012 ; Last revised: May 17, 2012
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