A post Keynesian theory for Tobin's q in a stock-flow consistent framework. Issue 2 (2nd April 2016)

• Record Type: Journal Article
• Authors: Bernardo, Javier López; Stockhammer, Engelbert; Martínez, Félix López
• Is Part Of: Journal of post Keynesian economics. Volume 39:Issue 2(2016)
• Page Start: 256
• Page End: 285
• Publication Date: 2016-04-02
• Subjects: Cambridge corporate models -- Miller–Modigliani dividend irrelevance proposition -- post Keynesian macroeconomic theory -- stock-flow consistent models -- Tobin's q; E12 -- E22 -- E44 -- G10 -- O42; 330.15
• DOI: 10.1080/01603477.2016.1145061
• Languages: English
• ISSNs: 0160-3477

Abstract

ABSTRACT: The paper proposes a post Keynesian framework to explain Tobin's q behavior in the long run. The theoretical basis is informed by the Cambridge corporate model originally proposed by Kaldor (1966 ), which is reinterpreted here as a theory for q. The core of the "Kaldorian q theory" is a negative long-run relation between q and growth rates, a negative relation between q and propensities to consume, and the fact that q can be different from 1 in the long-run equilibrium. We generalize this model through a medium-scale stock-flow consistent (SFC) model, which introduces important post Keynesian aspects missing in the Kaldorian model, such as endogenous money, a financial system, and inflation. We extend the model to include a more realistic treatment of firms' financial structure decisions and allow the interdependence between these decisions and dividend policy. Numerical simulations confirm that the original Kaldorian relations between q and growth rates and propensities to consume hold, but unlike the original model, in our model, q is not independent of how firms finance their investment. We also confirm the possibility of q being different from 1 in the long run. Finally, we contrast this "post Keynesian q theory" with the Miller–Modigliani dividend irrelevance proposition and the neoclassical investment and financial theory. It is shown that its validity depends crucially on the value taken by q : for q values different from 1 the proposition will not hold and dividend policy will be relevant for equity valuation. Therefore, post Keynesian q theory stands against the main predictions of mainstream finance and constitutes an alternative for developing a macroeconomic theory for equity markets.