Intangible Capital and the Investment-q Relation
56 Pages Posted: 7 Mar 2014 Last revised: 2 Sep 2016
Date Written: February 21, 2016
The neoclassical theory of investment has mainly been tested with physical investment, but we show it also helps explain intangible investment. At the firm level, Tobin's q explains physical and intangible investment roughly equally well, and it explains total investment even better. Compared to physical capital, intangible capital adjusts more slowly to changes in investment opportunities. The classic q theory performs better in firms and years with more intangible capital: Total and even physical investment are better explained by Tobin's q and are less sensitive to cash flow. At the macro level, Tobin's q explains intangible investment many times better than physical investment. We propose a simple, new Tobin's q proxy that accounts for intangible capital, and we show that it is a superior proxy for both physical and intangible investment opportunities.
Keywords: Tobin's q, Investment, Intangible Capital, R&D, Organization Capital
JEL Classification: E22, G31, O33
Suggested Citation: Suggested Citation