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Marginal Q, Tobin’s Q, Cash Fow and InvestmentKlaus Peter GuglerVienna University of Economics and Business Administration; European Corporate Governance Institute (ECGI) Dennis C. MuellerUniversity of Vienna - Center for Business Studies - Department of Economics B. Burcin YurtogluWHU - Otto Beisheim School of Management 2003 Southern Economic Journal, Vol. 70, No. 3, 2003 Abstract: 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, L21 Accepted Paper SeriesDate posted: May 16, 2012 ; Last revised: May 17, 2012Suggested CitationContact Information
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