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Another look at the linear q model: an empirical analysis of aggregate business capital spending with maintenance expenditures

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Abstract:

Abstract. 

The paper revisits the empirical investment literature, which has established that aggregate business fixed investment is not found to be related linearly to marginal or average Tobin's q. The theoretical background is extended here by developing a supply-side model where the depreciation rate of private capital is determined endogenously. The firm can either invest in ‘new’ capital, which adds directly to the existing capital stock at the presence of convex adjustment costs, or extend the durability of installed capital through maintenance expenditure, which affects its depreciation rate. The model shows that Tobin's q is then a positively related sufficient statistic for both components of aggregate capital expenditures. This central implication is tested empirically using aggregate time-series survey data from Canada on ‘new’ investment and maintenance expenditures covering the period 1956–93. The estimated relationships produce significant and plausible parameter estimates for the structural parameters of the q model.

Keywords: D92; E22

Document Type: Research Article

DOI: https://doi.org/10.1111/j.1540-5982.2006.00390.x

Affiliations: Department of International and European Economic Studies, Athens University of Economics and Business

Publication date: 2006-11-01

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