Abstract
In this paper two models of investment stemming from the neoclassical theory are derived in a unifying framework. The Q type models view the stock market valuation of a firm as an allencompassing variable determining its investment decisions, while the Euler equation for investment highlights the dynamic nature of firms’ decision-making. A sample of 779 UK manufacturing companies listed in the London Stock Exchange in the period 1971-1990 is used to compare the empirical fit of the two different models of investment. Despite a number of difficulties, the Q model appears to be empirically superior delivering the desirable consistency between theory and data.
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