Tobin's Q And Investment: Evidence From Chinese Listed Company Panel Data

Investment is of paramount importance for business cycle fluctuations and economic growth, while it is not surprising that, in China, investment is not determined totally by fundamental economical factors. This paper test the rationality of corporate investment in a Tobin's Q model framework using Chinese listed company panel data.The famous hypothesis of Tobin's Q proposed that Tobin's Q, the ratio of expected net present value of asset to its replacement cost, is the most important factor in investment decision (or even the only factor). If Q is less than 1, indicating it should be cheaper for the company to buy the old building, and therefore will not invest to build a new; if Q is greater than 1 there will be new investments. So the stock price increasing will lead to increase in the value of Q and the return on investment to improve, results in increasing investment.However, Empirical studies from China don't support this hypothesis (Feng Wei,1999; Zheng JiangHuai,2001; Wei Feng,2004; Yang Xingquan et.al, 2009). They found that Tobin's Q has a weak effect on corporate investment. On the other hand, the "Tobin Q hypothesis" test can be seen as reflection of the investment rationality (DING Shou-Hai,2006). Rejection of Tobin Q hypothesis may be equal to reject the rationality of corporate investment.We test a adjusted Tobin's Q model using Chinese listed company data from 2003 to 2007. We found that there is "anti-Tobin's Q" phenomenon:the higher the current value of Q, the less business investment. This anomaly may be a reflection of enterprises'non-rational elements.Different to the previous literature, we also considered the weak form of the Tobin's q hypothesis to reflect the possible existence of delayed reaction, which examines how the lagged Tobin's q value affects the current investment. Empirical results indicate that a larger lagged q-value will predict a higher current investment. This conclusion is robust after controlling the business characters and financing constraints.