The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms.

The authors derive, from a model of investment with multiple capital goods, a one-to-one relation between the growth rate of the capital aggregate and the stock-market-based Q. The authors estimate the growth-Q relation using a panel of Japanese manufacturing firms taking into account the endogeneity of Q. For early years of their sample, cash flow has significant explanatory power over and above Q. The estimated Q coefficient implies that the adjustment cost is less than a half of gross profits net of the adjustment costs. Copyright 1991 by The Econometric Society.