THE COMPARATIVE PERFORMANCE OF Q-TYPE AND DYNAMIC MODELS OF FIRM INVESTMENT: EMPIRICAL EVIDENCE FROM THE UK
Athens University of Economics and Business,
Bank of Greece
In this paper two models of investment stemming from the neoclassical theory are derived in a unifying framework. The Q type models view the stock market valuation of a firm as an all-encompassing variable determining its investment decisions, while the Euler equation for investment highlights the dynamic nature of firms’ decision-making. A sample of 779 UK manufacturing companies listed in the London Stock Exchange in the period 1971-1990 is used to compare the empirical fit of the two different models of investment. Despite a number of difficulties, the Q model appears to be empirically superior delivering the desirable consistency between theory and data.
Keywords: Empirical investment models, Euler equation for investment, Q model
JEL classification: E22, C23, D92
The author would like to thank Heather Gibson, Jürgen von Hagen and Huntley Schaller for their valuable comments, as well as participants at the seminar series of the Centre for European Integration Studies in Bonn, the Econometric Society European Meeting 2004 and the Canadian Economic Association Conference 2004. The views expressed in this paper do not necessarily reflect those of the Bank of Greece.
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