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Q-theory of investment and earnings retentions—evidence from Scandinavia

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  • Johan Eklund

Abstract

In a frictionless milieu retentions should have no impact on investment behavior. However, empirical studies typically find that retentions are an important determinant of investment. Managerial discretion and financial constraints are two alternative explanations that have been suggested. This paper uses a panel of listed Scandinavian firms to examine the importance of retentions as a determinant of investment. Measures of Tobin’s Q, marginal q and sales accelerator are used to control for investment opportunities. Scandinavian firms are found to depend on retentions to a high degree, more so than in other developed economies. This high dependence on retentions suggests that the Scandinavian capital markets are suffering from allocational inefficiencies. Moreover, these market frictions appear too large to per se be caused by information asymmetries or managerial discretion phenomena. Possible institutional explanations are suggested.
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  • Johan Eklund, 2010. "Q-theory of investment and earnings retentions—evidence from Scandinavia," Empirical Economics, Springer, vol. 39(3), pages 793-813, December.
    • Handle: RePEc:spr:empeco:v:39:y:2010:i:3:p:793-813
    DOI: 10.1007/s00181-009-0323-5
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    3. Sinem Celik Girgin & Thanasis Karlis & Hong-Oanh Nguyen, 2018. "A Critical Review of the Literature on Firm-Level Theories on Ship Investment," IJFS, MDPI, vol. 6(1), pages 1-19, January.

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    More about this item

    Keywords

    Investment; Liquidity; Retained earnings; Free cash flow; Tobin’s Q ; Marginal q ; G0; G30;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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