Cross-Sectional Tobin's Q

43 Pages Posted: 26 Feb 2012 Last revised: 27 Feb 2012

See all articles by Frederico Belo

Frederico Belo

INSEAD; Centre for Economic Policy Research (CEPR)

Chen Xue

University of Cincinnati

Lu Zhang

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

Multiple version iconThere are 3 versions of this paper

Date Written: February 2012


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, while maintaining a good fit for the average return spread across the extreme deciles. 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. The model also does a good job in matching asset price levels within each industry, allowing technological heterogeneity across industries. We suggest that any differences between the intrinsic value and the market value of equity tend to dissipate in the long run.

Keywords: Tobin's Q, investment, valuation, structural estimation

JEL Classification: D21, E22, G12

Suggested Citation

Belo, Frederico and Xue, Chen and Zhang, Lu, Cross-Sectional Tobin's Q (February 2012). AFA 2013 San Diego Meetings Paper, Available at SSRN: or

Frederico Belo

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Chen Xue

University of Cincinnati ( email )

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

Lu Zhang (Contact Author)

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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