Speed and Tobin's Q
Résumé
Firms that are slow in the execution of investment projects often incur substantial revenue losses. However, accelerating investments generally results in higher investment costs. In this paper, we integrate this investment speed tradeoff in a reduced-form model of project development to create an empirical proxy for firm speed. We examine how deviations from industry-average speed in the execution of large investments in oil and gas facilities worldwide from 1996 to 2005 impact firm value, as measured by Tobin's q. We find that there is substantial variation in investment speed among firms in the oil and gas industry. Using a linear correlated random parameter model to account for unobserved firm heterogeneity, we show that faster firms have higher firm value when speed results from firms' dynamic capabilities. On average, accelerating a firm's investments by 5% (or 1 month) below the industry norm due to dynamic capabilities increases market value by $214.3 million. Additionally, we show that the effect of speed on firm value varies widely among firms and is amplified by good corporate governance but often mitigated by the level of firms' debt.