The stock market and investment:: another look at the micro-foundations of q theory

This paper introduces a novel distinction between real q and financial q. The paper examines three versions of financial q developed by Brainard and Tobin, Minsky and Hayashi, respectively. These theories differ regarding the nature of stock market price determination and their use of marginal productivity theory. It is shown that non-profit maximising behaviour by managers does not invalidate q theory. It is also shown that if managers and shareholders have different profit expectations, this leads to an equilibrium value of q that differs from unity. Lastly, the implicit claims in q theory regarding the efficient role of stock markets as regulators of capital accumulation are shown to depend on assumptions about stockholder behaviour.