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Marginal q, Tobin's q, Cash Flow, and Investment

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  • Klaus Gugler
  • Dennis C. Mueller
  • B. Burcin Yurtoglu

Abstract

Many studies of the determinants of investment use Tobin's q to control for the investment opportunities of a firm. Tobin's q roughly measures the average return on a firm's capital anticipated by the market. More relevant for investment decisions, however, is the marginal return on capital. In this paper we estimate investment and research and development (R&D) equations using a measure of marginal q. We use marginal q to identify the existence of cash constraints and managerial discretion and as a separate explanatory variable. For a sample of 560 U.S. firms observed over the 1977‐1996 period we present evidence confirming the existence of both cash constraints in some companies and managerial discretion in others.

Suggested Citation

  • Klaus Gugler & Dennis C. Mueller & B. Burcin Yurtoglu, 2004. "Marginal q, Tobin's q, Cash Flow, and Investment," Southern Economic Journal, John Wiley & Sons, vol. 70(3), pages 512-531, January.
    • Handle: RePEc:wly:soecon:v:70:y:2004:i:3:p:512-531
    DOI: 10.1002/j.2325-8012.2004.tb00586.x
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