Fixed investment decisions in UK manufacturing: The importance of Tobin's Q, output and debt

In a neoclassical intertemporal framework real investment is determined by Tobin's marginal-Q. We develop this approach to include both agency costs of debt and regime changes, where in some periods the firm may be demand constrained. This leads to a ‘wedge’ between marginal and average-Q and i...

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Bibliographic Details
Published in:European economic review 1995-05, Vol.39 (5), p.919-941
Main Authors: Cuthbertson, K., Gasparro, D.
Format: Article
Language:English
Subjects:
Agency theory
Capital investments
Cointegration
Debt
Debt financing
Economic models
Error-correction-model
Investment
Investments
Manufacturing
Output
Tobin's Q
United Kingdom
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Summary:In a neoclassical intertemporal framework real investment is determined by Tobin's marginal-Q. We develop this approach to include both agency costs of debt and regime changes, where in some periods the firm may be demand constrained. This leads to a ‘wedge’ between marginal and average-Q and in addition to the latter variable, investment depends on capital gearing and output. The model is used to explain UK fixed investment in the manufacturing sector 1968–1990 using an error-correction model and cointegration techniques. The statistical performance of the model, including parameter stability is satisfactory.
ISSN:0014-2921
1873-572X
DOI:10.1016/0014-2921(93)E0131-4