Another Look at the Linear Q Model: An Empirical Analysis of Aggregate Business Capital Spending with Maintenance Expenditures

34 Pages Posted: 30 Oct 2006

See all articles by Sarantis C. Kalyvitis

Sarantis C. Kalyvitis

Athens University of Economics and Business - Department of International and European Economic Studies

Abstract

The paper revisits the empirical investment literature, which has established that aggregate business fixed investment is not found to be related linearly to marginal or average Tobin's q. The theoretical background is extended here by developing a supply-side model where the depreciation rate of private capital is determined endogenously. The firm can either invest in new capital, which adds directly to the existing capital stock at the presence of convex adjustment costs, or extend the durability of installed capital through maintenance expenditure, which affects its depreciation rate. The model shows that Tobin's q is then a positively related sufficient statistic for both components of aggregate capital expenditures. This central implication is tested empirically using aggregate time-series survey data from Canada on 'new' investment and maintenance expenditures covering the period 1956-93. The estimated relationships produce significant and plausible parameter estimates for the structural parameters of the q model.

Suggested Citation

Kalyvitis, Sarantis C., Another Look at the Linear Q Model: An Empirical Analysis of Aggregate Business Capital Spending with Maintenance Expenditures. Canadian Journal of Economics, Vol. 39, No. 4, pp. 1282-1315, November 2006, Available at SSRN: https://ssrn.com/abstract=940836 or http://dx.doi.org/10.1111/j.1540-5982.2006.00390.x

Sarantis C. Kalyvitis (Contact Author)

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

Patission Str 76
GR-10434 Athens
Greece

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