Q: Risk, Rents, or Growth?

67 Pages Posted: 26 Mar 2020 Last revised: 29 Apr 2020

See all articles by Alexandre Corhay

Alexandre Corhay

University of Toronto - Rotman School of Management

Howard Kung

London Business School; Centre for Economic Policy Research (CEPR)

Lukas Schmid

University of Southern California - Marshall School of Business

Date Written: March 1, 2020

Abstract

The dramatic stock market crash of March 2020 was preceded by a prolonged rise in Tobin's Q and a productivity slowdown. Do longer stock market booms and sharper corrections reflect structural changes in the US economy? We address this question about Q by estimating an endogenous growth model featuring realistic risk premia and markups. Our baseline estimates highlight the importance of rising market power for explaining increasing valuation ratios despite declining growth prospects with weakening investment and innovation over the past decade. High industry concentration exacerbates economic downturns and stock market corrections triggered by adverse economic shocks. We provide novel forecasts about growth expectations based on current market valuations using our structural model.

Keywords: Tobin's Q, Aggregate demand, Simulated method of moments, Corporate investment, Intangible capital, Innovation, Industry concentration, Price-dividend ratios, Asset valuations, Equity premium

Suggested Citation

Corhay, Alexandre and Kung, Howard and Schmid, Lukas, Q: Risk, Rents, or Growth? (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3546667 or http://dx.doi.org/10.2139/ssrn.3546667

Alexandre Corhay (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
4169780512 (Phone)

Howard Kung

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lukas Schmid

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

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