The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms

41 Pages Posted: 7 Aug 2007 Last revised: 10 Aug 2010

See all articles by Fumio Hayashi

Fumio Hayashi

National Graduate Institute for Policy Studies

Taroh Inoue

Motorola Japan Ltd.

Date Written: April 1990

Abstract

We derive from a model of investment with multiple capital goods a one-to-one relation between the growth rate of the capital aggregate and the stock market-based Q. We estimate the growth-Q relation using a panel of Japanese manufacturing firms taking into account the endogeneity of Q. Identification is achieved by combining the theoretical structure of the Q model and an assumed serial correlation structure of the technology shock which is the error term in the growth-Q equation. For early years of our sample. cash flow has significant explanatory power over and above Q. The significance of cash flow disappears for more recent years for the heavy industry when Japanese capital markets was liberalized. The estimated Q coefficient implies that the adjustment cost is less than a half of gross profits net of the adjustment cost.

Suggested Citation

Hayashi, Fumio and Inoue, Taroh, The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms (April 1990). NBER Working Paper No. w3326. Available at SSRN: https://ssrn.com/abstract=468832

Fumio Hayashi (Contact Author)

National Graduate Institute for Policy Studies ( email )

Roppongi 7-22-1
Minato-ku
Tokyo, 106-0032
Japan

HOME PAGE: http://https://sites.google.com/site/fumiohayashi/home

Taroh Inoue

Motorola Japan Ltd. ( email )

3-10-1 MinamiAzabu
Minato-ku
Tokyo, 106-8573
Japan
81332808701 (Phone)

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