A Supply Approach to Valuation

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.