Investment, Tobin's q, and Interest Rates

Xiaoji Lin, Chong Wang, Neng Wang and Jinqiang Yang
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Chong Wang: Naval Postgraduate School, Monterey
Jinqiang Yang: Shanghai University of Finance and Economics

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: To study the impact of stochastic interest rates and capital illiquidity on investment and firm value, we incorporate a widely-used arbitrage-free term structure model of interest rates into a standard q-theoretic framework. Our generalized q model informs us to use corporate credit-risk information to predict investments when empirical measurement issues of Tobin's average q are significant (e.g., equity is much more likely to be mis-priced than debt) as in Philippon (2009). Consistent with our theory, we find that credit spreads and bond q have significant predictive powers on micro-level and aggregate investments corroborating the recent empirical work of Gilchrist and Zakrajšek (2012). We also show that the quantitative effects of the stochastic interest rates and capital illiquidity on investment, Tobin's average q, the duration and user cost of capital, as well as the value of growth opportunities are substantial. These findings are particularly important in today's low interest-rate environment.

JEL-codes: E02 G12 G31 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-cfn and nep-mac
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Related works:
Journal Article: Investment, Tobin’s q, and interest rates (2018)
Working Paper: Investment, Tobin's q, and Interest Rates (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2016-20

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