Thursday, April 19, 2018

Q is better than you think

This lovely graph comes from "Learning and the Improving Relationship Between Investment and q" by Daniel Andrei, William Mann, and Nathalie Moyen. The careful investment and q measurement make it much better than similar figures I've made for example Figure 4 here. Their paper explores the puzzle, just why did q theory work worse before 1995?

The graph also bears on the "monopoly" debate. Corporations are making huge profits, stocks are high, yet we don't see investment, the story goes -- marginal q must be much less than average q, indicating some sort of fixed factor or rent. Not in the graph.


  1. How would you square this with other work such as Gutierrez & Phillipon which finds that investment is low relative to Q (and low generally)? The difference seems to be that Mann & Andre look at investment relative to capital base K, while Gutierrez & Phillipon look at investment relative to operating profits. In a basic AK model, these should be proportional, so it's odd that the two groups draw opposite conclusions about whether investment relative to q is in-line or low.

  2. Consider the case where all corporations bought and sold needed corporate assets,building, land, machine. No leaks, make it simple. An efficient market would have a Q slightly above one to cover integration costs, but an efficient stock market means cash swaps always tend to force Q to efficiency. So the interesting question, when does Q deviate, meaning there is a severe leak from the closed Q model.

  3. Does anybody in the investment community use Tobin's q or some forward version of it to make active investment decisions? Forward P/E ratios might be controversial (and misleading) but they are used to guide investment allocation.

    Can I raise the notion of secure and well-defined economic property rights (individual and collective) in this context? The contemporary question is should there be important ethnic and sectarian exceptions to the desirability of said rights.

    I ask because the graph of Tobin's q I have seen seem to acquire a negative slope on the heels of significant shocks to security.

    Note that President Trump now views Muslims as posing an existential threat to US security. Although absurd at face value, it does suggest blow back from the post-war US policy of selective violent takings.



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