Cross-Sectional Tobin's Q

44 Pages Posted: 7 Sep 2010

See all articles by Frederico Belo

Frederico Belo

University of Minnesota; INSEAD; National Bureau of Economic Research (NBER)

Chen Xue

University of Cincinnati

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2010

Abstract

The neoclassical investment model matches cross-sectional asset prices both in first differences and in levels. With ten book-to-market deciles as the testing portfolios, the investment model largely matches the Tobin's Q spread and the average return spread across the extreme deciles. The parameter estimates imply low adjustment costs around 1.7% of sales. The model's fit results from three aspects of our econometric strategy: (i) We test the model at the portfolio level to alleviate the impact of measurement errors; (ii) we match the first moment to mitigate the impact of temporal misalignment between asset prices and investment; and (iii) we allow for nonlinear marginal costs of investment. Our evidence suggests that any differences between the intrinsic value of equity and the market value of equity tend to dissipate in the long run.

Suggested Citation

Belo, Frederico and Xue, Chen and Zhang, Lu, Cross-Sectional Tobin's Q (September 2010). NBER Working Paper No. w16336. Available at SSRN: https://ssrn.com/abstract=1672588

Frederico Belo (Contact Author)

University of Minnesota ( email )

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INSEAD ( email )

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France

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
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Chen Xue

University of Cincinnati ( email )

College of Business Administration
Cincinnati, OH 45221
United States
(513) 556-7078 (Phone)

Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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