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Marginal Q, Tomin´s Q, Cash Flow and Investment

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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 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 562 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.

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  • Klaus Gugler & Denni C. Mueller & B. Burcin Yurtoglu, 2000. "Marginal Q, Tomin´s Q, Cash Flow and Investment," Vienna Economics Papers vie0002, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie0002
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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