Excess Capacity, Marginal q and Corporate Investment
103 Pages Posted: 22 Jul 2020 Last revised: 5 Oct 2023
Date Written: September 19, 2023
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: Suggested Citation