Using Patent Capital to Estimate Tobin's q

Abstract

I construct a new proxy for Tobin's q that incorporates the replacement cost of patent capital. This proxy, which I call patent q, explains up to 62% more variation in investment than other proxies for q. Furthermore, investment is more sensitive to patent q than to other proxies for q. Although investment is predicted more accurately by, and is more sensitive to, patent q, controlling for patent q leads to relatively larger, not smaller, cash flow coefficients. All results are stronger in subsamples with more patent capital. Overall, patent q strengthens the historically weak investment-q relation.

Keywords: Intangible capital, investment, patents, Tobin's q

JEL Classification: G31, O33, O34