Extensions of the Multiple q Model: (I) Heterogeneity by Enterprise Size

This chapter extends the Multiple q model to individual firm data that include small and medium-sized enterprises as well as large ones. To do so in a feasible way, we divide capital goods into land and other tangible fixed assets. Our estimation results for the sample period 2004–2013 show that land should be treated as an independent capital good that incurs unique adjustment costs regardless of enterprise size. However, we also find that some variables that are considered redundant under the standard Tobin’s q theory, such as debt ratio and tangibility, have significant explanatory power and that lumpy investment behaviors exist that cannot be handled by a smooth investment adjustment cost function. The lumpiness of investment behaviors is higher for smaller firms, suggesting that capital market imperfections constrain some lumpy investments.