Financial frictions, investment and tobin's q
By: Guido Lorenzoni, Karl Walentin
Contributors: Walentin, Karl; National Bureau of Economic Research
Series: NBER working paper series -- working paper 13092; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 13092.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "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"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/16/2007.

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