Q: Risk, Rents, or Growth?

72 Pages Posted: 26 Mar 2020 Last revised: 19 Dec 2023

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

We document that the increasing polarization in Tobin’s Q within industries is closely connected to the growing divergence in rents and the emergence of superstar firms over the past four decades, while discount rates and growth rates did not exhibit the same increasing dispersion. We explain these industry polarization trends in an estimated general equilibrium model where each industry consists of large superstar oligopolists and small monopolistically competitive firms with endogenous transitions between them. Small firms make investments in speculative innovation to increase their probability of becoming a superstar. Our model estimation finds that rising entry barriers in both small and superstar firms contribute to rising polarization in markups, but the rising barriers to creating small firms account for most of the divergence in Q. Stunting the creation of small firms generates greater incentives for speculative innovation, magnifying the impact of market power dispersion on industry polarization in Q.

Keywords: Tobin's Q, Aggregate demand, Simulated method of moments, Corporate investment, Intangible capital, Innovation, Industry concentration

Suggested Citation

Corhay, Alexandre and Kung, Howard and Schmid, Lukas, Q: Risk, Rents, or Growth? (March 1, 2020). USC Marshall School of Business Research Paper Sponsored by iORB, No. Forthcoming, 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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