Using Patent Capital to Estimate Tobin's q

42 Pages Posted: 17 Jul 2019 Last revised: 13 Jan 2020

See all articles by Michael Woeppel

Michael Woeppel

Purdue University - Purdue University, Krannert School of Management, Students

Date Written: January 11, 2020

Abstract

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

Woeppel, Michael, Using Patent Capital to Estimate Tobin's q (January 11, 2020). Available at SSRN: https://ssrn.com/abstract=3420322 or http://dx.doi.org/10.2139/ssrn.3420322

Michael Woeppel (Contact Author)

Purdue University - Purdue University, Krannert School of Management, Students ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

HOME PAGE: http://www.mikewoeppel.com

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