Abstract
We investigate whether measures of intangible capital based on advertising and R&D can explain variation in Tobin's Q ratio for the pharmaceutical and chemical industry. The study is motivated by prior literature studying this relation in other industries, recent literature investigating intangible capital in this industry, and the larger controversy about whether stock valuations have been high due to irrational investors or large investment in intangible capital. We find that our measures of intangible capital are statistically significant determinants of Q and explain 20% of the variation in our sample. When age and industry are incorporated into the model our explanatory power reaches 25%.
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