By BOYAN JOVANOVIC The Q-theory investment says that a ï¬rmâs investment rate should rise with its Q (the ratio market value to the replacement cost captial). We argue here that this theory also explains why some ï¬rms buy other ï¬rms. We ï¬nd that: (i) a ï¬rmâs merger and acquisition (M&A) investment responds to its Q more (by a factor 2.6) than its direct investment does, probably because M&A investment is a high ï¬xed cost and a low marginal adjustment cost activity; (ii) the typical ï¬rm wastes some cash on M&Aâs, but not on internal investment (i.e., the âfreecash ï¬owâ story works, but it explains only a small fraction mergers); and (iii) the merger waves 1900 and the 1920âs, 1980âs, and 1990âs were a response to proï¬table reallocation opportunities, but the 1960âs wave was probably caused by something else. There are two distinct used-capital markets. Used equipment and structures sometimes trade unbundled in that ï¬rm 1 buys a machine or building from ï¬rm 2, but ï¬rm 2 continues to exist. At other times, ï¬rm 1 buys ï¬rm 2 and thereby gets to own all ï¬rm 2âs capital. In both markets, the traded capital gets a new owner. In a
American Economic Review – American Economic Association
Published: May 1, 2002
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