Corporate policy and market value: A q-Theory approach

In this paper, we show that Tobin's q has a significant predictive power in explaining valuation consequences of major corporate policy variables. Our empirical results reveal that, depending upon whether a firm is overinvesting or underinvesting, financial markets respond quite differently to its capital structure, dividend payout, financial slack, and R & D decisions. Overall, the empirical results suggest that both high debt ratios and greater payouts are favorably viewed by the market when firms are overinvesting. For firms with growth opportunities, however, large debt is unfavorably viewed by the market. In addition, financial slack and R & D expenditures are favorably received by the market for growth firms but not for overinvesting firms.