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Aggregate Investment, Tobin’s q and External Finance

Lookup NU author(s): Dr Fabrizio Casalin

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Abstract

We introduce financial frictions in the Tobin’s q model and estimate our model using aggregate data for the US. We find that financial frictions are more relevant than the industrial ones, and that financial market prices do not generate exogenous innovations to aggregate investment, thus explaining the poor empirical performance of Tobin’s q models. We then investigate whether the availability of external finance affects investment of non-financial corporations, finding that financial flows and investment display uncorrelated dynamics. The Tobin’s q seems a better theory of external finance than investment.

Publication metadata

Author(s): Dia E, Casalin F

Publication type: Article

Publication status: Submitted

Journal: Journal of Economics and Business

Year: 2013

ISSN (print): 0022-2879

ISSN (electronic): 1538-4616

Publisher: Wiley-Blackwell Publishing, Inc.

Notes: Revised and re-submitted 2013

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