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Cambridge Journal of Economics 25:657-667 (2001)
Copyright © 2001 Cambridge Political Economy Society

Article

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

Thomas I. Palley

AFL-CIO, 815 Sixteenth Street, NW, Washington, DC 20006, USA: tpalley{at}aflcio.org

Abstract

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.

Key Words: q theory • Stock markets • Investment • Arbitrage • Cost of equity capital • Profit maximisation


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