Excess Capacity, Marginal q and Corporate Investment

103 Pages Posted: 22 Jul 2020 Last revised: 5 Oct 2023

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: September 19, 2023

Abstract

Theory posits that when managers anticipate excess capacity, average q becomes a biased estimator of marginal q as the potential for underutilizing new capital diminishes the marginal benefit of investing. After correcting for this source of measurement error, the explanatory power of Tobin’s q model substantially improves in time-series and cross-sectional regressions as well as in out-of-sample tests. These findings, combined with a secular erosion in capacity utilization, seem to explain why corporate investment rates have been declining for decades despite a significant increase in average q. The erosion in capacity utilization is mainly driven by recessions and appears to be a consequence of economic rigidities.

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 (September 19, 2023). 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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