Tobin’s q and corporate investment with a pandemic shock

Shilin Li, Tongtong Li, Jinqiang Yang and Siqi Zhao

Economics Letters, 2021, vol. 209, issue C

Abstract: We analyze the impact of COVID-19 on investment by incorporating a stochastic transmission shock into the standard q theoretical framework. Our model suggests that the adjustment cost amplifies the negative pandemic shock to investment and decreases firm value. In particular, when the infection rate is low, the reduction in investment is higher for firms with low adjustment costs in that they are more sensitive to the infection rate. An optimistic expectation of the arrival rate of a vaccine reduces the probability of executing mitigation policy. Moreover, the uncertainty of the pandemic increases investment and enhances firm value during the pandemic regime.

Keywords: Adjustment costs; Pandemic risk; Mitigation policy; Corporate investment (search for similar items in EconPapers)
JEL-codes: E20 G01 H56 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:209:y:2021:i:c:s0165176521004183

DOI: 10.1016/j.econlet.2021.110141

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