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
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.red-files-public.s3.amazonaws.com/meetpapers/2006/paper_844.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

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)
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:red:sed006:844

Access Statistics for this paper

More papers in 2006 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().