A supply approach to valuation

Frederico Belo, Chen Xue, Lu Zhang

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

A new methodology for equity valuation arises from the perspective of managers' supply of capital assets. Under q-theory, managers optimally adjust the supply of assets to changes in their market value. The first-order condition of investment then provides a valuation equation that infers asset prices from managers' costs of supplying the assets. This equation fits well the Tobin's q levels across many testing assets, including portfolios formed on q. With current investment-to-capital as the only input, the supply approach does not require cash flow forecasts or discount rate estimates, both of which are notoriously difficult to obtain in practice.

Original languageEnglish (US)
Pages (from-to)3029-3067
Number of pages39
JournalReview of Financial Studies
Volume26
Issue number12
DOIs
StatePublished - Dec 1 2013

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