Learning and the Improving Relationship Between Investment and q
52 Pages Posted: 21 Nov 2017 Last revised: 18 Apr 2018
Date Written: January 24, 2018
We show that the relationship between aggregate investment and Tobin’s q has become remarkably tight in recent years, contrasting with earlier eras. We attribute this change to the growing empirical dispersion in Tobin’s q, which we document in both in the cross-section and the time-series. To study the source of this dispersion, we augment a standard investment model with learning. Information acquisition endogenously amplifies 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 lower level of tangible capital. We confirm the model’s predictions in the data, and disentangle our mechanism from measurement error in q.
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