Investment, Tobin's Q, and Multiple Capital Inputs

41 Pages Posted: 8 Jun 2004 Last revised: 24 Jul 2022

See all articles by Robert S. Chirinko

Robert S. Chirinko

CESifo (Center for Economic Studies and Ifo Institute); University of Illinois at Chicago, Department of Finance

Date Written: October 1986

Abstract

Despite their solid theoretical basis, models of business investment based on Tobin's Q theory have recorded a generally disappointing empirical performance. This paper examines one possible source of misspecification. When the firm's technology is expanded to include two or more capital inputs, the investment equation following from maximizing behavior includes Q as well as a series of additional explanatory variables. The importance of these omitted variables is assessed, and the econometric evidence is mixed, as the Multi-Capital Q model clearly dominates the Conventional specification but empirical problems remain. In addition, the implications of the parameter estimates from the Conventional and Multi-Capital models for tax policy are noted.

Suggested Citation

Chirinko, Robert S. and Chirinko, Robert S., Investment, Tobin's Q, and Multiple Capital Inputs (October 1986). NBER Working Paper No. w2033, Available at SSRN: https://ssrn.com/abstract=309592

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