Exit, Selection and the Value of Firms

By Hugo Hopenhayn
1991| Working Paper No. 1177

This paper studies a competitive dynamic model with firm level uncertainty and derives implications for the distribution of firm values and Tobin’s q. Allowing for entry and exit, the model determines endogenously the degree of selection. A consequence of this selection is that average industry q values are biased above one. As parameters describing the technology and firm level uncertainty are changed, the equilibrium distribution for q values changes. This comparative statics is developed in the paper._x000B_