Using Patent Capital to Estimate Tobin's q
42 Pages Posted: 17 Jul 2019 Last revised: 13 Jan 2020
Date Written: January 11, 2020
I develop a new proxy for Tobin's q that incorporates the replacement cost of patent capital. This proxy, which I call PI (physical plus intangible) q, explains up to 63% more variation in firm-level investment than two commonly-used proxies for q. The elasticity of investment with respect to q is higher when using PI q than when using other proxies for q. Both of these results are relatively stronger in industries and time periods with more intangible capital. I also find that when controlling for PI q, the positive investment-cash flow relation among growth firms, small firms, and young firms, which has been interpreted as evidence of financing constraints, mostly disappears. Overall, my results provide new evidence supporting the q theory of investment.
Keywords: Intangible capital, investment, patents, Tobin's q
JEL Classification: G31, O33, O34
Suggested Citation: Suggested Citation