IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2082.html
   My bibliography  Save this paper

Tobin's Q and Financial Policy

Author

Listed:
  • Robert S. Chirinko

Abstract

Recent research in macroeconomics has emphasized the importance of linking the financial and real sectors and the need for working with optimizing models. Tobin’s Q model of investment would appear to provide a framework that can satisfy these two criteria. In contrast to the original presentation of the Q model, the formal development has not recognized that the firm actively participates in a number of financial markets; in this broader context, we show that Q is likely to be an uninformative and possibly misleading signal for investment expenditures . We then endeavor to turn this negative theoretical result to positive advantage in resolving a number of empirical problems with Q models, but the modifications dictated by the theory receive little support from the data.

Suggested Citation

  • Robert S. Chirinko, 1986. "Tobin's Q and Financial Policy," NBER Working Papers 2082, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2082
    Note: EFG ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2082.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Benjamin M. Friedman, 1985. "Corporate Capital Structures in the United States," NBER Books, National Bureau of Economic Research, Inc, number frie85-1.
    2. Barnea, Amir & Haugen, Robert A & Senbet, Lemma W, 1981. "An Equilibrium Analysis of Debt Financing under Costly Tax Arbitrage and Agency Problems," Journal of Finance, American Finance Association, vol. 36(3), pages 569-581, June.
    3. Sargent, Thomas J, 1981. "Interpreting Economic Time Series," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 213-248, April.
    4. Blanchard, Olivier J. & Wyplosz, Charles, 1981. "An empirical structural model of aggregate demand," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 1-28.
    5. Poterba, James M. & Summers, Lawrence H., 1983. "Dividend taxes, corporate investment, and `Q'," Journal of Public Economics, Elsevier, vol. 22(2), pages 135-167, November.
    6. repec:bla:econom:v:44:y:1977:i:174:p:163-78 is not listed on IDEAS
    7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    8. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    9. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    10. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    11. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    12. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    13. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Strulik, Holger, 2003. "Capital tax reform, corporate finance, and economic growth and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 595-615, December.
    2. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-588, August.
    3. Christopher F. Baum & Andreas Stephan & Oleksandr Talavera, 2009. "The Effects Of Uncertainty On The Leverage Of Nonfinancial Firms," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 216-225, April.
    4. Hennessy, Christopher A. & Levy, Amnon & Whited, Toni M., 2007. "Testing Q theory with financing frictions," Journal of Financial Economics, Elsevier, vol. 83(3), pages 691-717, March.
    5. Audretsch, David B. & Elston, Julie Ann, 2002. "Does firm size matter? Evidence on the impact of liquidity constraints on firm investment behavior in Germany," International Journal of Industrial Organization, Elsevier, vol. 20(1), pages 1-17, January.
    6. Alan Carruth & Andrew Dickerson & Andrew Henley, 2000. "Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty," Manchester School, University of Manchester, vol. 68(3), pages 276-300, June.
    7. Richard W. Kopcke, 1995. "Tobin's Q, economic rents, and the optimal stock of capital," Working Papers 95-4, Federal Reserve Bank of Boston.
    8. Gonzalez, Pedro & Vasconcellos, Geraldo M. & Kish, Richard J., 1998. "Cross-border mergers and acquisitions: The undervaluation hypothesis," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(1), pages 25-45.
    9. Michael P. O'Malley, 1996. "Tax exhaustion, firm investment, and leasing; a test of the Q model of investment," Finance and Economics Discussion Series 96-31, Board of Governors of the Federal Reserve System (U.S.).
    10. Richard W. Kopcke, 1992. "Tobin's Q, economic rents, and the optimal stock of capital," Working Papers 92-3, Federal Reserve Bank of Boston.
    11. Cuthbertson, K. & Gasparro, D., 1995. "Fixed investment decisions in UK manufacturing: The importance of Tobin's Q, output and debt," European Economic Review, Elsevier, vol. 39(5), pages 919-941, May.
    12. Hansen, Sten, 1999. "Agency Costs, Credit Constraints and Corporate Investment," Working Paper Series 79, Sveriges Riksbank (Central Bank of Sweden).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hansen, Sten, 1999. "Agency Costs, Credit Constraints and Corporate Investment," Working Paper Series 79, Sveriges Riksbank (Central Bank of Sweden).
    2. Richard W. Kopcke, 1992. "Tobin's Q, economic rents, and the optimal stock of capital," Working Papers 92-3, Federal Reserve Bank of Boston.
    3. Serge Nadeau & Robert P. Strauss, 1991. "Tax Policies and the Real and Financial Decisions of the Firm: the Effects of the Tax Reform Act of 1986," Public Finance Review, , vol. 19(3), pages 251-292, July.
    4. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    5. Tryphon Kollintzas, 1986. "Tax Policy under Nongeometric Physical Depreciation," Public Finance Review, , vol. 14(3), pages 263-288, July.
    6. Jean-Bernard Chatelain, 2002. "Structural modelling of investment and financial constraints: Where do we stand?," Working Paper Research 28, National Bank of Belgium.
    7. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    8. Brahima Coulibaly & Jonathan N. Millar, 2008. "The Asian financial crisis, uphill flow of capital, and global imbalances: evidence from a micro study," International Finance Discussion Papers 942, Board of Governors of the Federal Reserve System (U.S.).
    9. O’Connor, Matthew & Rafferty, Matthew & Sheikh, Aamer, 2013. "Equity compensation and the sensitivity of research and development to financial market frictions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2510-2519.
    10. Jean-Bernard Chatelain, 2003. "Structural modelling of financial constraints on investment: where do we stand?," Chapters, in: Paul Butzen & Catherine Fuss (ed.), Firms’ Investment and Finance Decisions, chapter 2, pages 40-58, Edward Elgar Publishing.
    11. Cummins, Jason G. & Hassett, Kevin A. & Hubbard, R. Glenn, 1996. "Tax reforms and investment: A cross-country comparison," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 237-273, October.
    12. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    13. Michael P. O'Malley, 1996. "Tax exhaustion, firm investment, and leasing; a test of the Q model of investment," Finance and Economics Discussion Series 96-31, Board of Governors of the Federal Reserve System (U.S.).
    14. Oksanen, Olli-Pekka, 2006. "Are Foreign Investments Replacing Domestic Investments? - Evidence from Finnish Manufacturing," Discussion Papers 1001, The Research Institute of the Finnish Economy.
    15. Richard W. Kopcke, 1991. "Economic rents, the demand for capital, and financial structure," Working Papers 91-8, Federal Reserve Bank of Boston.
    16. Hubbard, R Glenn & Kashyap, Anil K, 1992. "Internal Net Worth and the Investment Process: An Application to U.S. Agriculture," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 506-534, June.
    17. John R. Graham & Mark T. Leary & Michael R. Roberts, 2013. "A Century of Capital Structure: The Leveraging of Corporate America," NBER Chapters, in: New Perspectives on Corporate Capital Structure, National Bureau of Economic Research, Inc.
    18. Timothy Erickson & Toni M. Whited, 2006. "On the Accuracy of Different Measures of Q," Financial Management, Financial Management Association, vol. 35(3), Autumn.
    19. Bhagat, Sanjai & Welch, Ivo, 1995. "Corporate research & development investments international comparisons," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 443-470, April.
    20. Cuthbertson, K. & Gasparro, D., 1995. "Fixed investment decisions in UK manufacturing: The importance of Tobin's Q, output and debt," European Economic Review, Elsevier, vol. 39(5), pages 919-941, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2082. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.