Financial Frictions, Investment and Tobin's Q
Author | : Guido Lorenzoni |
Publisher | : |
Total Pages | : 48 |
Release | : 2007 |
ISBN-10 | : IND:30000163942950 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Financial Frictions, Investment and Tobin's Q written by Guido Lorenzoni and published by . This book was released on 2007 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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, generate realistic correlations between investment, q, and cash flow. Keywords: Financial constraints, investment, Tobin's q, limited enforcement. JEL Classifications: E22, E30, E44, G30.