EconPapers    
Economics at your fingertips  
 

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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393218304574
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Financial Frictions, Investment and Tobin’s q (2007) Downloads
Working Paper: Financial Frictions, Investment and Tobin's q (2007) Downloads
Working Paper: Financial Frictions, Investment and Tobin's q (2006) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

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

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().

 
Page updated 2021-04-09
Handle: RePEc:eee:moneco:v:103:y:2019:i:c:p:105-122