The Q-Theory of IPOs

Abstract

We find that new firms’ real investment responds much more elastically to aggregate Tobin’s Q than does that of established firms. On the financial side, IPOs respond more elastically to Tobin’s Q than seasoned offerings of securities. The explanation seems to be that a high aggregate Q raises new firms’ desired investment much more than it raises the desired investment of incumbents. For the period from 1955 to 2001, the Q-elasticity of IPOs is about 1.2, and the elasticity of new-firms’ investment is about 0.7. These are about 20 times more than is usual in Q regressions. On the other hand, the Q-elasticity of seasoned offerings is actually negative (-0.05), and the elasticity of incumbents’ investment is 0.04. Though not statistically significant, the average of these estimates is even smaller than is usual.