Working Paper: NBER ID: w12462
Authors: Thomas Philippon
Abstract: 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.
Keywords: Tobin's q; investment; bond prices; corporate finance
JEL Codes: E0; E44; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bond market's q (G12) | Investment behavior (G11) |
| Bond market's q (G12) | Investment equation fit (G11) |
| Bond yields (G12) | Tobin's q (G19) |
| Tobin's q (G19) | Investment rates (G31) |
| Bond market's q (G12) | Elasticity of investment (E22) |
| Equity market mispricing (G19) | Investment behavior discrepancies (G40) |