Tobin's Q And Financial Policy Revisited

Research by Chirinko (1982,1985,1987) makes a convincing argument that Q theory is unlikely to provide a satisfactory investment model. However, Klock Thies, and Baum (1991) show that Q is commonly mismeasured. The finding is applicable to Chirinko’s empirical research and raises the question of weather the failure of empirical Q models is the result of measurement errors. Utilizing disaggregated data with more accurately measured Qs, we test Chirinko's model. The results are improved and eliminate some of the anomalies Chirinko obtained. Since better Q data improves the performance of empirical Q models, the dismissal of Q theory may be premature.