Exhuming Q: Market Power vs. Capital Market Imperfections

22 Pages Posted: 24 Mar 2001 Last revised: 7 Dec 2001

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

João Ejarque

University of Essex - Department of Economics

Date Written: March 2001

Abstract

Evidence of the statistical significance of profits in Q regressions remains one of the principal findings in the empirical investment literature. This result is frequently taken to support the view that capital market imperfections are an important element for understanding investment. This paper challenges that conclusion. We argue that allowing the profit function at the firm level to be strictly concave, reflecting, for example, market power, is sucent to replicate the Q theory based regression results in which profits are a significant factor determining investment. To be clear, our ability to replicate the existing results does not require the specification of any capital market imperfections. Thus the friction that explains the statistical significance of profits could be market power by sellers rather than capital market imperfections.

Suggested Citation

Cooper, Russell W. and Gil Ejarque, João Miguel, Exhuming Q: Market Power vs. Capital Market Imperfections (March 2001). NBER Working Paper No. w8182. Available at SSRN: https://ssrn.com/abstract=264436

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

João Miguel Gil Ejarque

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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