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Marginal q , Tobin's q , Cash Flow, and Investment
Author(s) -
Gugler Klaus,
Mueller Dennis C.,
Yurtoglu B. Burcin
Publication year - 2004
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2004.tb00586.x
Subject(s) - tobin's q , economics , cash flow , investment (military) , discretion , sample (material) , return on investment , monetary economics , capital (architecture) , econometrics , microeconomics , finance , production (economics) , chemistry , archaeology , chromatography , politics , political science , law , history
Many studies of the determinants of investment use Tobin's q to control for the investment opportunities of a firm. Tobin's q roughly measures the average return on a firm's capital anticipated by the market. More relevant for investment decisions, however, is the marginal return on capital. In this paper we estimate investment and research and development (R&D) equations using a measure of marginal q. We use marginal q to identify the existence of cash constraints and managerial discretion and as a separate explanatory variable. For a sample of 560 U.S. firms observed over the 1977‐1996 period we present evidence confirming the existence of both cash constraints in some companies and managerial discretion in others.