KTH/CESIS Working Paper Series in Economics and Institutions of Innovation
Q-theory of Investment and Earnings Retentions - Evidence from Scandinavia
Abstract: In a frictionless milieu retentions should have no impact
on investment behavior. However, empirical studies typically find that
retentions are an important determinant of investment. Managerial
discretion and financial constraints are two alternative explanations that
have been suggested. This paper uses a panel of listed Scandinavian firms
to examine the importance of retentions as a determinant of investment.
Measures of Tobinís Q, marginal q and sales accelerator are used to control
for investment opportunities. Scandinavian firms are found to depend on
retentions to a high degree, more so than in other developed economies.
This high dependence on retentions suggests that the Scandinavian capital
markets are suffering from allocational inefficiencies. Moreover, these
market frictions appear too large to per se be caused by information
asymmetries or managerial discretion phenomena. Possible institutional
explanations are suggested.
Keywords: investment; liquidity; retained earnings; free cash flow; Tobinís Q; marginal q; (follow links to similar papers)
JEL-Codes: G30; (follow links to similar papers)
39 pages, December 3, 2008
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