Cross-sectional Tobin's Q / Frederico Belo, Chen Xue, Lu Zhang.

Format:

Book

Author/Creator:

Belo, Frederico.

Contributor:

National Bureau of Economic Research.

Xue, Chen.

Zhang, Lu.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16336.

NBER working paper series no. w16336

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

The neoclassical investment model matches cross-sectional asset prices both in first differences and in levels. With ten book-to-market deciles as the testing portfolios, the investment model largely matches the Tobin's Q spread and the average return spread across the extreme deciles. The parameter estimates imply low adjustment costs around 1.7% of sales. The model's fit results from three aspects of our econometric strategy: (i) We test the model at the portfolio level to alleviate the impact of measurement errors; (ii) we match the first moment to mitigate the impact of temporal misalignment between asset prices and investment; and (iii) we allow for nonlinear marginal costs of investment. Our evidence suggests that any differences between the intrinsic value of equity and the market value of equity tend to dissipate in the long run.

Notes:

Print version record

September 2010.