A Supply Approach to Valuation

Review of Financial Studies, Forthcoming

69 Pages Posted: 8 Sep 2013

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)

Date Written: September 1, 2013

Abstract

A new methodology for equity valuation arises from the perspective of managers’ supply of capital assets. Under q-theory, managers optimally adjust the supply of assets to changes in their market value. The first-order condition of investment then provides a valuation equation that infers asset prices from managers’ costs of supplying the assets. This equation fits well the Tobin’s q levels across many testing assets, including portfolios formed on q. With current investment-to-capital as the only input, the supply approach does not require cash flow forecasts or discount rate estimates, both of which are notoriously difficult to obtain in practice.

Keywords: Valuation, Tobin's q, investment, structural estimation

JEL Classification: D21, E22, G12

Suggested Citation

Belo, Frederico and Xue, Chen and Zhang, Lu, A Supply Approach to Valuation (September 1, 2013). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2322023

Frederico Belo

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Centre for Economic Policy Research (CEPR) ( email )

London
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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