Marginal Q, Tobin’s Q, Cash Fow and Investment
49 Pages Posted: 16 May 2012 Last revised: 6 Jan 2017
Date Written: 2003
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
Suggested Citation: Suggested Citation