Journal of Stock & Forex Trading
Open Access

Abstract

Corporate Investment: Accounting for Alternative Propensities

Joseph PO and Shanhong Wu

We investigate whether previous evidence of the weakness of Tobin’s q ratio to explain variation in capital expenditure investment stems from ignoring R&D as an alternative investment. We develop and test modified q models that account for individual firms’ ex ante propensities to make these alternative types of investment. The structure of these models leads naturally to our use of propensity regression methodology in empirical tests. Using data on U.S. firms for 1974-2008, our approach yields strong and robust support for q theory. We also find evidence of the influence of financial constraints on investment.