Abstract
A new methodology for equity valuation arises from the perspective of managers' supply of capital assets. Under q-theory, managers optimally adjust the supply of assets to changes in their market value. The first-order condition of investment then provides a valuation equation that infers asset prices from managers' costs of supplying the assets. This equation fits well the Tobin's q levels across many testing assets, including portfolios formed on q. With current investment-to-capital as the only input, the supply approach does not require cash flow forecasts or discount rate estimates, both of which are notoriously difficult to obtain in practice.
Original language | English (US) |
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Pages (from-to) | 3029-3067 |
Number of pages | 39 |
Journal | Review of Financial Studies |
Volume | 26 |
Issue number | 12 |
DOIs | |
State | Published - Dec 1 2013 |
Externally published | Yes |
Bibliographical note
Publisher Copyright:© 2013 © The Author 2013.