Working Paper: NBER ID: w1449
Authors: Peter J. Elmer; Patric H. Hendershott
Abstract: This paper suggests that the decline in equity prices, and thus in Tobin's average q, during the 1970s may be attributable to changes in expected relative factor prices. More specifically, q is shown to be a negative function of the extent to which current relative factor price expectations differ from those when capital was put in place. Because relative factor prices became more volatile after 1967, the observed decline in average q, and thus in stock prices, can be explained by the "relative price" hypothesis.
Keywords: Tobin's q; equity prices; relative factor prices; financial markets; monetary economics
JEL Codes: G12; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected changes in relative factor prices (F16) | Tobin's average q (H87) |
| Tobin's average q (H87) | equity prices (G12) |
| unexpected changes in relative factor prices (F16) | equity prices (G12) |
| volatility of relative factor prices (F16) | profitability of existing capital (G31) |
| volatility of relative factor prices (F16) | Tobin's average q (H87) |
| decline in equity prices (G12) | volatility of relative factor prices (F16) |