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Using Patent Capital to Estimate Tobin’s Q

Published online by Cambridge University Press:  31 January 2022

Michael Woeppel Open the ORCID record for Michael Woeppel [Opens in a new window]
Michael Woeppel*
Affiliation:
Indiana University Kelley School of Business
*
[email protected] (corresponding author)
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Abstract

I construct a new proxy for Tobin’s Q that incorporates the replacement cost of patent capital. This proxy, which I call patent Q, explains up to 62% more variation in investment than other proxies for Q. Furthermore, investment is more sensitive to patent Q than to other proxies for Q. Although investment is predicted more accurately by, and is more sensitive to, patent Q, controlling for patent Q leads to relatively larger, not smaller, cash flow coefficients. All results are stronger in subsamples with more patent capital. Overall, patent Q strengthens the historically weak investment–Q relation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 8 , December 2022 , pp. 2929 - 2967
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

This paper is based on my dissertation at Purdue University. I am particularly indebted to Deniz Yavuz for his insightful guidance. I am also grateful for the valuable advice of Huseyin Gulen, John McConnell, and Noah Stoffman. I would also like to thank an anonymous referee, Daniel Andrei, Logan Emery, Mara Faccio, Fotis Grigoris, Jarrad Harford (the editor), Craig Holden, Mitch Johnston, Ben McCartney, Ryan Peters, Kelly Shue, Toni Whited, and seminar participants at Ball State University, Binghamton University, Indiana University, Purdue University, Southern Methodist University, and University of Western Ontario for helpful comments. All remaining errors are my own.

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