The relationship between stock prices and firms' investments in physical capital is captured by what theory?

Question

Quizplus · Accepted Answer

The theory that captures the relationship between stock prices and firms' investments in physical capital is q theory. Q theory suggests that the market value of a firm (q) can affect investment decisions by signaling the cost and availability of investment funds. When q is high, it suggests that the firm's growth opportunities outweigh the cost of investment funds, leading to increased investment in physical capital. Conversely, when q is low, the firm is more likely to focus on maintaining dividend payments and minimizing investment spending.

The Relationship Between Stock Prices and Firms' Investments in Physical