TY - JOUR
T1 - Financial frictions, investment, and Tobin's q
AU - Cao, Dan
AU - Lorenzoni, Guido
AU - Walentin, Karl
N1 - Publisher Copyright:
© 2018 Elsevier B.V.
PY - 2019/5
Y1 - 2019/5
N2 - 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.
AB - 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.
KW - Financial constraints
KW - Investment
KW - Limited enforcement
KW - Optimal financial contracts
KW - Tobin's q
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U2 - 10.1016/j.jmoneco.2018.08.002
DO - 10.1016/j.jmoneco.2018.08.002
M3 - Article
AN - SCOPUS:85053721132
SN - 0304-3932
VL - 103
SP - 105
EP - 122
JO - Carnegie-Rochester Confer. Series on Public Policy
JF - Carnegie-Rochester Confer. Series on Public Policy
ER -