Working Paper: NBER ID: w16336
Authors: Frederico Belo; Chen Xue; Lu Zhang
Abstract: 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.
Keywords: Tobin's Q; Investment; Asset Pricing; Equity Valuation
JEL Codes: E22; G12; G14; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tobin's q (G19) | stock returns (G12) |
| investment (G31) | Tobin's q (G19) |
| Tobin's q (G19) | intrinsic value (D46) |
| intrinsic value (D46) | market value (D46) |
| market value (D46) | stock returns (G12) |