Discussion Paper

The relationship of firm growth and Q with multiple capital goods: theory and evidence from panel data on Japanese firms

Abstract: We develop a Q model of investment with multiple capital goods that delivers a one-to-one relation between the growth rate of the capital aggregate and the stock market-based Q. We estimate the growth-Q relation using a panel of over six hundred Japanese manufacturing firms taking into account the endogeneity of Q. Identification is achieved by combining the theoretical structure of the Q model and an assumed serial correlation structure of the technology shock that comprises the error term in the growth-Q relation. The Q variable is significantly related to firm growth. Much, but not all, of the apparent explanatory power of cash flow disappears if its endogeneity is corrected for. The estimated Q coefficient is not implausibly small if the growth rate of the capital aggregate contains measurement error.

Keywords: Japan; Business enterprises - Japan;

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Discussion Paper / Institute for Empirical Macroeconomics

Publication Date: 1989

Number: 13