Intangible Capital and the Investment-q Relation

56 Pages Posted: 7 Mar 2014 Last revised: 2 Sep 2016

See all articles by Ryan H. Peters

Ryan H. Peters

Tulane University - Finance & Economics

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Date Written: February 21, 2016

Abstract

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

Peters, Ryan H. and Taylor, Lucian A., Intangible Capital and the Investment-q Relation (February 21, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2405231 or http://dx.doi.org/10.2139/ssrn.2405231

Ryan H. Peters

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

Lucian A. Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

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