Multiple q and Investment in Japan, Volume 1: Theory and Estimation

This book, as the first volume of a two volume treatise, develops a consistent framework of the investment function that allows for the heterogeneity of capital goods, i.e., the Multiple q model, with theoretical extensions and empirical applications to investment behavior in Japan. The standard approach to investment behavior is Tobin’s q theory in which the investment rate is a linear function of only the q ratio, or a firm’s market value measured by its capital goods. As is well known, however, its empirical performance has been almost universally unsatisfactory. This treatise in two volumes offers a new approach to deal with this problem in a way relaxing the homogeneous capital assumption of Tobin’s q theory. In this volume (Volume 1) on theory and estimation, following a comprehensive overview of the literature of investment function, the authors develop Multiple q model and statistically test null hypotheses set on such issues as (a) heterogeneity of multiple capital goods, (b) non-convex adjustment costs to inspire lumpy investment, using Japanese corporate financial data. The empirical test results show that, irrespective of the time period, firms’ characteristics, and the industry to which firms belong, (a) multiple capital goods are not homogeneous, and (b) some firms face adjustment cost structures that eventually lead to occasional lumpy investment.