Why Did the q Theory of Investment Start Working?

65 Pages Posted: 21 Nov 2017 Last revised: 8 Aug 2018

Daniel Andrei

McGill University

William Mann

University of California, Los Angeles (UCLA) - Anderson School of Management

Nathalie Moyen

University of Colorado at Boulder - Department of Finance

Date Written: August 7, 2018

Abstract

We show that the relationship between aggregate investment and Tobin’s q has become remarkably tight in recent years, contrasting with earlier times. We connect this change with the growing empirical dispersion in Tobin’s q, which we document both in the cross-section and the time-series. To study the source of this dispersion, we augment a standard investment model with two distinct mechanisms related to firms’ research activities: innovations and learning. Both innovation jumps in cash flows and the frequent updating of beliefs about future cash flows endogenously amplify volatility in the firm’s value function. Perhaps counterintuitively, the investment-q regression works better for research-intensive industries, a growing segment of the economy, despite their greater stock of intangible assets. We confirm the model’s predictions in the data, and we disentangle the results from measurement error in q.

Suggested Citation

Andrei, Daniel and Mann, William and Moyen, Nathalie, Why Did the q Theory of Investment Start Working? (August 7, 2018). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3073938 or http://dx.doi.org/10.2139/ssrn.3073938

Daniel Andrei (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

William Mann

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Nathalie Moyen

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-735-4931 (Phone)
303-492-5962 (Fax)

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