Excess Capacity, Marginal q and Corporate Investment

55 Pages Posted: 22 Jul 2020 Last revised: 1 Sep 2021

See all articles by Gustavo Grullon

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

David L. Ikenberry

Leeds School of Business, University of Colorado Boulder

Date Written: July 1, 2021

Abstract

Theory predicts that when managers expect the firm to operate below full capacity, marginal q will be less than average q as the prospect of underutilizing new capital reduces the marginal benefit of investing. To control for this potential bias in average q, we augment the q model with a proxy for capacity utilization. This adjustment substantially improves the explanatory power of investment regressions relative to traditional models. Moreover, our findings indicate that investment is remarkably sensitive to capacity utilization. These results, combined with the erosion in capacity utilization over time, seem to explain the puzzling secular decline in the rate of corporate investment despite a material increase in average q. These empirical findings hold across all G7 countries and are robust across a variety of dimensions.

Keywords: Corporate Investment, Tobin’s q, Marginal q, Asset Utilization, Capacity Utilization, Excess Capacity

JEL Classification: D24, E22, G31

Suggested Citation

Grullon, Gustavo and Ikenberry, David L., Excess Capacity, Marginal q and Corporate Investment (July 1, 2021). Available at SSRN: https://ssrn.com/abstract=3638505 or http://dx.doi.org/10.2139/ssrn.3638505

Gustavo Grullon (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

David L. Ikenberry

Leeds School of Business, University of Colorado Boulder ( email )

Boulder, CO 80309-0419
United States
303-492-1809 (Phone)

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