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Returns To Equity, Investment And Q: Evidence From The Uk

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  • SIMON PRICE
  • CHRISTOPH SCHLEICHER

Abstract

Conventional wisdom has it that Tobin's Q cannot help explain aggregate investment. However, the standard linearized present‐value asset price decomposition suggests that it should be able to predict other variables, such as stock returns. Using a new data set for the UK, we find that Q has strong predictive power for debt accumulation, stock returns and UK business investment. The correctly signed results on both returns and investment appear to be robust, and are supported by the commonly used and bootstrapped standard error corrections, as well as recently developed asymptotic corrections.

Suggested Citation

  • Simon Price & Christoph Schleicher, 2005. "Returns To Equity, Investment And Q: Evidence From The Uk," Manchester School, University of Manchester, vol. 73(s1), pages 32-57, September.
    • Handle: RePEc:bla:manchs:v:73:y:2005:i:s1:p:32-57
    DOI: 10.1111/j.1467-9957.2005.00460.x
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    Cited by:

    1. Kilponen, Juha & Verona, Fabio, 2016. "Testing the Q theory of investment in the frequency domain," Bank of Finland Research Discussion Papers 32/2016, Bank of Finland.
    2. Gallegati, Marco & Ramsey, James B., 2013. "Structural change and phase variation: A re-examination of the q-model using wavelet exploratory analysis," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 60-73.
    3. Basu, Parantap & Gillman, Max & Pearlman, Joseph, 2012. "Inflation, human capital and Tobin's q," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 1057-1074.
    4. Kilponen, Juha & Verona, Fabio, 2016. "Testing the Q theory of investment in the frequency domain," Research Discussion Papers 32/2016, Bank of Finland.
    5. repec:zbw:bofrdp:2016_032 is not listed on IDEAS
    6. Mark J. Holmes, 2010. "An Alternative Perspective on Tobin's Q and Aggregate Investment Expenditure," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 9(1), pages 23-28, April.
    7. Gallegati, Marco & Ramsey, James B., 2013. "Bond vs stock market's Q: Testing for stability across frequencies and over time," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 138-150.

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