Financial Frictions, Investment and Tobin's q

Guido Lorenzoni and Karl Walentin ()

No 844, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a model of investment with financial constraints and use it to investigate the relation between investment and Tobin’s q. A firm is financed partly by insiders, who control its assets, and partly by outside investors. When insiders’ wealth is scarce, they earn a rate of return higher than the market rate of return, i.e. insiders earn a quasi-rent on invested capital. This rent is priced into the value of the firm, so Tobin’s q is driven by two forces: changes in the value of invested capital, and changes in the value of the insiders’ future rents. The second effect weakens the correlation between q and investment. We calibrate the model and show that, thanks to this effect, the model can generate realistic correlations between investment, q and cash flow

Keywords: Financial constraints; Tobin's q; limited enforcement; investment; optimal capital structure (search for similar items in EconPapers)
JEL-codes: E22 E30 E44 E51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-fmk and nep-mac
Date: 2006-12-03
View citations in EconPapers

Downloads: (external link)
http://repec.org/sed2006/up.18042.1140057390.pdf (application/pdf)

Related works:
Working Paper: Financial Frictions, Investment and Tobin's q (2007)
Working Paper: Financial Frictions, Investment and Tobin’s q (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this paper

More papers in 2006 Meeting Papers from Society for Economic Dynamics
Address: Society for Economic Dynamics Anne Stubing CV Starr Center for Applied Economics 269 Mercer Street, Room 303 New York University New York, NY 10003
Contact information at EDIRC.
Series data maintained by Christian Zimmermann ().