Technology and Investment

Volume 3, Issue 4 (November 2012)

ISSN Print: 2150-4059   ISSN Online: 2150-4067

Google-based Impact Factor: 0.47  Citations  

Equity Market or Bond Market—Which Matters the Most for Investment? Revisiting Tobin’s q Theory of Investment

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DOI: 10.4236/ti.2012.34029    4,180 Downloads   7,130 Views  Citations

ABSTRACT

Recent experience seems to have shown that credit markets are more important than equity markets for investment and macrodynamics. This paper examines the effect of Tobin’s equity q and bond q on investment. More specifically we study the role of Tobin’s equity (usual) q, average q and bond q for aggregate investment over the period 1953: Q4-2011: Q1. Employing bond q and equity q, or alternatively bond q and average q, shows that these variables are very relevant in explaining investment. Yet, the time scale matters too. Examining the relationship of these variables over a long time scale, at low frequencies, we can show that the combination of bond q and average q are the most significant determinants of aggregate investment. Moreover, for the longer time scale the two variables, bond q and average q, result in the highest goodness of fit demonstrating good in-sample forecasting properties. As to the individual determinants of aggregate investment over the period 1953: Q4-2011: Q1, bond q is by far the most influential variable at all frequencies since it always has the highest correlation with investment and this correlation is always statistically significant. Similarly, the greater significance of average q, as compared to equity q, is probably an outcome of the financing instruments for investment.

Share and Cite:

W. Semmler and L. Mateane, "Equity Market or Bond Market—Which Matters the Most for Investment? Revisiting Tobin’s q Theory of Investment," Technology and Investment, Vol. 3 No. 4, 2012, pp. 203-209. doi: 10.4236/ti.2012.34029.

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