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Corporate Investment, Tobin's Q and Liquidity Management under Time-Inconsistent Preferences

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  • Yingjie Niu

    (School of Finance, Shanghai University of Finance and Economics)

  • Zhentao Zou

    (Economics and Management School, Wuhan University)

Abstract

We incorporate time-inconsistent preferences into a dynamic model of corporate investment and liquidity management. For the dividend strategy, we find time-inconsistent preferences always accelerate firm's cash payout. By contrast, the influence of time-inconsistent preferences on the investment policy is ambiguous, which depends on firm's liquidity measured by the cash-capital ratio w = W/K. It shows that time-inconsistent preferences induce the shareholder to over-invest when firm's liquidity is essentially low. However, the shareholder prefers under-investing as the firm has sufficient cash. Furthermore, we find time-inconsistent preferences significantly lower a firm's average q and marginal q as well as marginal value of liquidity. Finally, the impact on the investment policy and liquidity management also depends on such factors as whether the shareholder is sophisticated or naive in the expectation regarding his future time-inconsistent behavior.

Suggested Citation

  • Yingjie Niu & Zhentao Zou, 2019. "Corporate Investment, Tobin's Q and Liquidity Management under Time-Inconsistent Preferences," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 721-736, November.
    • Handle: RePEc:cuf:journl:y:2019:v:20:i:2:niuzou
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    References listed on IDEAS

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    Cited by:

    1. Pengfei Luo & Zhaojun Yang, 2021. "Investment and financing for cash flow discounted with group diversity," International Review of Finance, International Review of Finance Ltd., vol. 21(3), pages 769-785, September.

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    More about this item

    Keywords

    Time-inconsistent preferences; Investment; Liquidity management; Q theory;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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