Financial Frictions, Investment and Tobin’s q

Guido Lorenzoni and Karl Walentin

No 208, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We develop a model of investment with financial constraints and use it to investigate the relation between investment and Tobin’s q. Afirm is financed partly by insiders, who control its assets, and partly by outside investors. When their wealth is scarce, insiders earn a rate of return higher than the market rate of return, i.e., they receive 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 valu of the insiders’ future rents per unit of capital. This weakens the correlation between q and investment, relative to the frictionless benchmark. We present a calibrated version of the model, which, due to this effect, generates realistic correlations between investment, q, and cash flow.

Keywords: Financial constraints; investment; Tobin’s q; limited enforcement. (search for similar items in EconPapers)
JEL-codes: E22 E30 E44 G30 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2007-06-01
New Economics Papers: this item is included in nep-bec and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (13)

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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 (2006)
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