Investment without Q

31 Pages Posted: 24 Jul 2013 Last revised: 10 May 2016

Vito Gala

The Wharton School, University of Pennsylvania

Joao F. Gomes

The Wharton School

Date Written: April 1, 2016

Abstract

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

Gala, Vito and Gomes, Joao F., Investment without Q (April 1, 2016). The Wharton School Research Paper No. 41. Available at SSRN: https://ssrn.com/abstract=2297213

Vito Gala (Contact Author)

The Wharton School, University of Pennsylvania ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

João F. Gomes

The Wharton School ( email )

2329 SH-DH
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3666 (Phone)
215-898-6200 (Fax)

HOME PAGE: http://fnce.wharton.upenn.edu/profile/gomesj/

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