The Dynamics of Tobin's Q

49 Pages Posted: 15 Mar 2012 Last revised: 7 May 2016

See all articles by Giovanni Walter Puopolo

Giovanni Walter Puopolo

University of Naples Federico II - Department of Economic and Statistical Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2012


In this paper I propose a general-equilibrium model with proportional adjustment costs and industry-specific capital to study the firm migration phenomenon across market-to-book ratio. In my model, investors' desire to diversify their portfolios and investment frictions generate a mean-reverting dynamics of Tobin's q consistent with the probabilities of migration found in the data, and a nonlinear pattern in the conditional volatility of Tobin's q. In addition, since firms' market-to-book ratios are function of the state of the economy and contain information about stock returns, stock prices inherit these properties, yielding asset-pricing implications in line with the empirical evidence, namely the value premium and a non-monotone relationship between the volatility of stock returns and the Tobin's q.

Keywords: Investment, General equilibrium, Firm migration, Cross-section of returns, Book-to-market

JEL Classification: G12, D92, D51, D21, D24

Suggested Citation

Puopolo, Giovanni Walter, The Dynamics of Tobin's Q (February 1, 2012). Available at SSRN: or

Giovanni Walter Puopolo (Contact Author)

University of Naples Federico II - Department of Economic and Statistical Sciences ( email )

Via Cintia 26

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