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Financial Frictions, Investment and Tobin’s q


  • Karl Walentin

    (Sveriges Riksbank (Bank of Sweden))

  • Guido Lorenzoni

    (Northwestern University)

  • Dan Cao

    (Georgetown University)


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 their wealth is scarce, insiders earn a rate of return higher than the market rate of return, i.e., they receive 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 per unit of capital. This weakens the correlation between q and investment, relative to the frictionless benchmark. We present a calibrated version of the model, which, due to this effect, generates realistic correlations between investment, q, and cash flow.

Suggested Citation

  • Karl Walentin & Guido Lorenzoni & Dan Cao, 2013. "Financial Frictions, Investment and Tobin’s q," 2013 Meeting Papers 634, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:634

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    References listed on IDEAS

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    Cited by:

    1. Iachan, Felipe Saraiva, 2017. "Capital budgeting and risk taking under credit constraints," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 786, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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