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)
Date: 2006
New Economics Papers: this item is included in nep-bec, nep-fmk and nep-mac
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Related works:
Journal Article: Financial frictions, investment, and Tobin’s q (2019)
Working Paper: Financial Frictions, Investment and Tobin’s q (2007)
Working Paper: Financial Frictions, Investment and Tobin's q (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:844

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