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Endogenous discounting, investment and Tobin’s q

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  • Wu, Ting
  • He, Linfeng
  • Zhang, Fan

Abstract

This paper integrates endogenous discounting with the standard q theory of investment (Abel & Eberly, 1994; Hayashi, 1982). It shows that time-varying discount rate has significant effects on discouraging investment and lowering firm value via capital stock. Marginal q is not equal to average q in the endogenous discounting settings, contrary to the conventional wisdom. By decomposing a firm into assets in place and growth opportunities, we find that the value of assets in place is increasing in capital stock but the value of growth opportunities is nonmonotonic with capital stock. Furthermore, we extend the model to allow for endogenous capital liquidation and macroeconomic conditions.

Suggested Citation

  • Wu, Ting & He, Linfeng & Zhang, Fan, 2021. "Endogenous discounting, investment and Tobin’s q," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:ecofin:v:55:y:2021:i:c:s1062940820302023
    DOI: 10.1016/j.najef.2020.101315
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    More about this item

    Keywords

    Endogenous discounting; Investment; Average q; Marginal q; Assets in place; Growth opportunities;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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