We derive from a model of investment with multiple capital goods a one-toone
relation between the growth rate of the capital aggregate and the stock
market-based Q. We estimate the growth-Q relation using a panel of Japanese
manufacturing firms taking into account the endogeneity of Q. Identification
is achieved by combining the theoretical structure of the Q model and
an assumed serial correlation structure of the technology shock which is the
error term in the growth-Q equation. For early years of our sample. cash
flow has significant explanatory power over and above Q. The significance
of cash flow disappears for more recent years for the heavy industry when
Japanese capital markets was liberalized. The estimated Q coefficient
implies that the adjustment cost is less than a half of gross profits net of
the adjustment cost.
*Published:
Econometrica, Vol. 59, No. 3, May 1991, pp. 731-753.
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