Journal of Finance Vol. 80 No. 3 2025
Excess Capacity, Marginal q, and Corporate Investment
Abstract
Theory posits that when managers anticipate excess capacity, average q becomes a biased estimator of marginal q as the potential for underutilizing new capital reduces the marginal benefit of investing. After correcting for this source of measurement error, the explanatory power of Tobin's q substantially improves in time‐series and cross‐sectional regressions as well as in out‐of‐sample tests. These findings, together with a secular erosion in capacity utilization, help explain why corporate investment rates have been declining for decades despite average q increasing significantly. Our analysis indicates that economic rigidities have contributed to the persistent erosion in capacity utilization.
- DOI
- 10.1111/jofi.13439
- Volume
- 80
- Issue
- 3
- Pages
- 1533-1592
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref