Contribution of R&D capital to differences in Tobin's q among Japanese manufacturing firms: Evidence from an investment-based asset pricing model

We explain the differences in Tobin's q among Japanese manufacturing firms after the bubble burst in the early 1990s based on their physical and R&D capital investment. We calculate (estimate) the contribution of each block of physical and R&D capital investment to explain differences in Tobin's q by estimating each capital's unit's shadow values and their contributions to the differences in the realized Tobin's q. The steady growth of R&D capital after the bubble burst increased the R&D capital relative to the physical capital. The combined effect of this relative stock ratio and R&D capital's shadow value explain the high Tobin's q in highly R&D intensive firms. Conversely, Tobin's q is an inappropriate measure of physical capital investment in such highly R&D intensive firms.