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Aggregate Investment, Tobin's q and Insolvency

Author

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  • Leith, C.

Abstract

Despite being theoretically appealing, the standard q-theory of investment performs very poorly in empirical work. This paper extends the q-theory to include the possibility that costs associated with the risk of insolvency affect the firm's investment decisions. Using aggregate data for the UK business sector, the model is estimated both as a structural equation and in a less restrictive dynamic form which also allows for mis-measurement of Tobin's q by average q. The paper finds clear evidence that aggregate investment is influenced by the risk of insolvency.

Suggested Citation

  • Leith, C., 1998. "Aggregate Investment, Tobin's q and Insolvency," Discussion Papers 9911, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:9911
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    Cited by:

    1. Kirchesch, Kai, 2004. "Financial Risks, Bankruptcy Probabilities, and the Investment Behaviour of Enterprises," HWWA Discussion Papers 299, Hamburg Institute of International Economics (HWWA).
    2. Kirchesch, Kai, 2004. "Financial Risks, Bankruptcy Probabilities, and the Investment Behaviour of Enterprises," Discussion Paper Series 26185, Hamburg Institute of International Economics.

    More about this item

    Keywords

    INVESTMENTS ; RISK ; FINANCIAL CONSTRAINTS;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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