We investigate whether previous evidence of the weakness of Tobin�s q ratio to explain variation in capital\nexpenditure investment stems from ignoring R&D as an alternative investment. We develop and test modified q models\nthat account for individual firms� ex ante propensities to make these alternative types of investment. The structure of\nthese models leads naturally to our use of propensity regression methodology in empirical tests. Using data on U.S.\nfirms for 1974-2008, our approach yields strong and robust support for q theory. We also find evidence of the influence\nof financial constraints on investment.
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