32 Pages Posted: 20 Mar 2012 Last revised: 10 May 2016
Date Written: January 22, 2013
We estimate investment policy functions under general assumptions about technology and markets. Policy functions are easy to estimate and summarize the key predictions of any dynamic investment model. Because our method does not rely on Tobin's Q, it does not require information about market values and can be readily applied to study private firms. In addition, unlike Tobin's Q, we show that investment policy functions account for a large fraction of the variation in corporate investment. As such they are much better suited to evaluate and estimate dynamic investment models. Using this superior characterization of firm investment behaviour we then use indirect inference methods to estimate deep parameters of a structural model of investment featuring decreasing returns to scale and generalized adjustment cost functions.
Keywords: Corporate Investment, Firm Decisions, Indirect Inference
Suggested Citation: Suggested Citation
Gala, Vito and Gomes, Joao F., Investment without Q (January 22, 2013). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2024716 or http://dx.doi.org/10.2139/ssrn.2024716
By Lu Zhang