The Bond Market's q
NBER Working Paper No. 12462
I propose an implementation of the q-theory of investment using bond prices instead of equity prices. Credit risk makes corporate bond prices sensitive to future asset values, and q can be inferred from bond prices. The bond market's q performs much better than the usual measure in standard investment equations. With aggregate data, the fit is three times better, cash flows are driven out and the implied adjustment costs are reduced by more than an order of magnitude. The new measure also improves firm level investment equations.
Published: Philippon, Thomas. "The bond market’s Q," Quarterly Journal of Economics, August 2009.
This paper was revised on February 8, 2008