The Marginal Profit-to-Q Ratio: Reassessing the Cash-Flow Channel

66 Pages Posted: 7 Apr 2021 Last revised: 9 Apr 2021

See all articles by Ilan Cooper

Ilan Cooper

BI Norwegian Business School

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Chunyu Yang

BI Norwegian Business School

Date Written: April 6, 2021

Abstract

We study a production-based present-value relation that implies that fluctuations in the marginal profit-to-marginal Q ratio (mq) are driven by variations in the expected growth of marginal profits (cash-flow channel), expected investment return changes (discount-rate channel), or both. We find that in contrast to the aggregate dividend-to-price ratio, mq strongly predicts marginal profits growth at both short and long horizons, but not investment returns. mq also predicts (negatively) the growth rates of aggregate earnings, industrial production, and non-farm payrolls. Our findings can guide modeling in which the expected growth rate of marginal profits (at multiple horizons) is time-varying.

Keywords: Tobin's q; Marginal profits-to-q ratio; Investment return; Marginal profit of capital; Variance decomposition; VAR implied predictability; Aggregation bias; Long-horizon regressions; Dividend-to-price ratio; Structural estimation

JEL Classification: E22; E27; G10; G12; G17; G31

Suggested Citation

Cooper, Ilan and Maio, Paulo F. and Yang, Chunyu, The Marginal Profit-to-Q Ratio: Reassessing the Cash-Flow Channel (April 6, 2021). Available at SSRN: https://ssrn.com/abstract=3820588 or http://dx.doi.org/10.2139/ssrn.3820588

Ilan Cooper (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

Chunyu Yang

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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