Financial frictions, investment, and Tobin’s q

Dan Cao, Guido Lorenzoni and Karl Walentin

Journal of Monetary Economics, 2019, vol. 103, issue C, 105-122

Abstract: A model of investment with financial constraints is used to study the relation between investment and Tobin’s q. A firm is financed by both inside and outside investors. When insiders’ wealth is scarce, the firm’s value includes a quasi-rent on invested capital. Therefore, two forces drive q: the value of invested capital and future quasi-rents. Relative to a frictionless benchmark, this weakens the relationship between investment and q, generating more realistic correlations between investment, q, and cash flow. The quantitative implications of the model for investment regressions depend crucially on the nature of the shocks hitting the firm.

Keywords: Financial constraints; Optimal financial contracts; Investment; Tobin’s q; Limited enforcement (search for similar items in EconPapers)
JEL-codes: E22 E30 E44 G30 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Financial Frictions, Investment and Tobin’s q (2007)
Working Paper: Financial Frictions, Investment and Tobin's q (2007)
Working Paper: Financial Frictions, Investment and Tobin's q (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:103:y:2019:i:c:p:105-122

DOI: 10.1016/j.jmoneco.2018.08.002

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