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Financial Frictions, Investment and Tobin's q

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  • Guido Lorenzoni
  • Karl Walentin

    ()
    (Research Division Sveriges Riksbank (Bank of Sweden))

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

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 844.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:844

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Keywords: Financial constraints; Tobin's q; limited enforcement; investment; optimal capital structure;

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Citations

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Cited by:
  1. Gal, Peter & Pinter, Gabor, 2013. "Capital over the business cycle: renting versus ownership," Bank of England working papers 478, Bank of England.
  2. Zheng Liu & Pengfei Wang & Tao Zha, 2009. "Do Credit Constraints Amplify Macroeconomic Fluctuations?," Emory Economics 0910, Department of Economics, Emory University (Atlanta).
  3. Pengfei Wang & Yi Wen, 2012. "Hayashi Meets Kiyotaki and Moore: A Theory of Capital Adjustment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 207-225, April.
  4. Gozzi, Juan Carlos & Levine, Ross & Schmukler, Sergio L., 2006. "Internationalization and the evolution of corporate valuation," Policy Research Working Paper Series 3933, The World Bank.
  5. Pedro Elosegui & Paula Español & Demian Panigo & Juan Sotes Paladino, 2006. "Methodological Alternatives for the Analysis of Financial Constraints in Argentina," BCRA Working Paper Series 200602, Central Bank of Argentina, Economic Research Department.
  6. Leena Rudanko & Francois Gourio, 2010. "Customer Capital," 2010 Meeting Papers 121, Society for Economic Dynamics.
  7. Sandro Brusco & Eva Ropero, 2007. "Financing Constraints and Firm Dynamics with Durable Capital," Department of Economics Working Papers 07-08, Stony Brook University, Department of Economics.
  8. S. Viswanathan & Adriano Rampini, 2009. "Collateral and Capital Structure," 2009 Meeting Papers 525, Society for Economic Dynamics.
  9. Dan Cao, 2011. "Collateral Shortages, Asset Price and Investment Volatility with Heterogeneous Beliefs," Working Papers gueconwpa~11-11-01, Georgetown University, Department of Economics.
  10. Chan, Rosanna, 2008. "Financial constraints, working capital and the dynamic behavior of the firm," MPRA Paper 27153, University Library of Munich, Germany, revised Aug 2010.
  11. Galvao Jr, A. F. & Montes-Rojas, G., 2009. "Instrumental variables quantile regression for panel data with measurement errors," Working Papers 09/06, Department of Economics, City University London.
  12. Wang, Chong & Wang, Neng & Yang, Jinqiang, 2012. "A unified model of entrepreneurship dynamics," Journal of Financial Economics, Elsevier, vol. 106(1), pages 1-23.
  13. Claessens, Stijn & Ueda, Kenichi & Yafeh, Yishay, 2010. "Financial Frictions, Investment, and Institutions," CEPR Discussion Papers 8170, C.E.P.R. Discussion Papers.
  14. S. Viswanathan & Adriano A. Rampini, 2008. "Collateral, Financial Intermediation, and the Distribution of Debt Capacity," 2008 Meeting Papers 116, Society for Economic Dynamics.

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