The Marginal Profit-to-Q Ratio: Reassessing the Cash-Flow Channel
66 Pages Posted: 7 Apr 2021 Last revised: 9 Apr 2021
Date Written: April 6, 2021
We study a production-based present-value relation that implies that fluctuations in the marginal profit-to-marginal Q ratio (mq) are driven by variations in the expected growth of marginal profits (cash-flow channel), expected investment return changes (discount-rate channel), or both. We find that in contrast to the aggregate dividend-to-price ratio, mq strongly predicts marginal profits growth at both short and long horizons, but not investment returns. mq also predicts (negatively) the growth rates of aggregate earnings, industrial production, and non-farm payrolls. Our findings can guide modeling in which the expected growth rate of marginal profits (at multiple horizons) is time-varying.
Keywords: Tobin's q; Marginal profits-to-q ratio; Investment return; Marginal profit of capital; Variance decomposition; VAR implied predictability; Aggregation bias; Long-horizon regressions; Dividend-to-price ratio; Structural estimation
JEL Classification: E22; E27; G10; G12; G17; G31
Suggested Citation: Suggested Citation