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A Supply Approach to Valuation

Frederico Belo1,2; Chen Xue; Lu Zhang3,1

1 Fisher College · 2 Centre for Economic Policy Research · 3 National Bureau of Economic Research

Review of Financial Studies 2013 open access

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.

DOI
10.1093/rfs/hht067
Volume
26 (12)
Pages
3029-3067
Language
en
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BibTeX
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