Financial Frictions, Investment and Tobin's q

Guido Lorenzoni and Karl Walentin

No 13092, NBER Working Papers from National Bureau of Economic Research, Inc

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 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 value 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.

JEL-codes: E22 E30 E44 G30 (search for similar items in EconPapers)
Date: 2007-05
New Economics Papers: this item is included in nep-bec and nep-mac
Note: CF EFG
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Citations: View citations in EconPapers (9)

Published as Cao, Dan & Lorenzoni, Guido & Walentin, Karl, 2019. "Financial frictions, investment, and Tobin’s q," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 105-122.

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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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