Investment, Tobin's Q, and Vintage Capital: Theory and Evidence

40 Pages Posted: 19 Oct 2017

See all articles by Dmitry Livdan

Dmitry Livdan

University of California, Berkeley

Alexander Nezlobin

University of California, Berkeley - Haas School of Business

Date Written: October 4, 2017

Abstract

This paper extends the Q-theory of investment to capital goods with arbitrary efficiency profiles. Under the assumption of geometric economic depreciation employed by the traditional Q-theory, a firm's replacement cost of assets-in-place is independent of their vintage composition and can be directly measured by the firm's current productive capacity, i.e., its capital stock. When the economic depreciation is non-geometric, the firm's current capital stock and the replacement cost of its assets are fundamentally different aggregates of its investment history. We construct empirical proxies for these two quantities and show that, consistent with our theoretical predictions, vintage capital effects significantly improve the explanatory power of investment regressions. We further find that the effect of vintage capital in investment regressions is at least as strong as that of cash flow.

Keywords: Investment; Tobin's Q; Vintage Capital

JEL Classification: E22, G31

Suggested Citation

Livdan, Dmitry and Nezlobin, Alexander, Investment, Tobin's Q, and Vintage Capital: Theory and Evidence (October 4, 2017). Available at SSRN: https://ssrn.com/abstract=3055461 or http://dx.doi.org/10.2139/ssrn.3055461

Dmitry Livdan (Contact Author)

University of California, Berkeley ( email )

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Alexander Nezlobin

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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