The "q theory of investment," or "Tobin's q," states that
A)a rise in the stock market would lead firms to increase their rate of capital investment.
B)a fall in the stock market would lead firms to increase their rate of capital investment.
C)a rise in the stock market would lead firms to decrease their rate of capital investment.
D)there is no relationship between the stock price changes and the capital investment.

Question

Quizplus · Accepted Answer

The "q theory of investment" states that when the stock market rises, the value of a firm's assets increases, increasing the willingness of the firm to invest in additional assets. Therefore, a rise in the stock market would lead firms to increase their rate of capital investment.

The "Q Theory of Investment," or "Tobin's Q," States That