NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Relation Between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms

Fumio Hayashi, Tohru Inoue

NBER Working Paper No. 3326
Issued in April 1990
NBER Program(s):   PR   ME

We derive from a model of investment with multiple capital goods a one-to-one 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.

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Published: Econometrica, Vol. 59, No. 3, May 1991, pp. 731-753.

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