What Drives Q and Investment Fluctuations?
68 Pages Posted: 24 Mar 2017 Last revised: 22 Oct 2020
Date Written: October 22, 2020
Leading production-based asset pricing models predict that the sources of fluctuations in real investment and (scaled) stock prices are the same. Yet, extant empirical findings point to a large difference in these sources. We revisit this empirical question by deriving a present-value relation and conducting a VAR-based variance decomposition for model-implied marginal Q. We find that the bulk of fluctuations in Q (or alternatively, aggregate investment) is driven by expected investment return (discount rate) shocks. Yet, expected marginal profit shocks play a non-negligible role. Our findings are robust to aggregation-bias correction and different empirical designs.
Keywords: Asset pricing; Tobin's q; Present-value model; Investment return; Variance decomposition; VAR implied predictability; Aggregation bias; Marginal profit of capital; Long-horizon regressions
JEL Classification: E22; E27; G10; G12; G17; G31
Suggested Citation: Suggested Citation