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BPEA Article

Corporate Investment: Does Market Valuation Matter in the Aggregate?

Abstract

DOES CHARTING the course of q-the ratio of the market value of firms to the replacement cost of their assets-help in predicting investment by nonfinancial corporations? This study seeks to answer this question. In the process, it also analyzes the behavior of the after-tax rate of return on capital and the lag from new orders for capital goods to shipments to obtain consistent specifications and to check on the compatibility of results. Special attention is paid to the construction and interpretation of q and how it functions in concert with nonfinancial variables in the orders and investment equations.

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