2007, English, Article, Working paper edition: Financial frictions investment and Tobin's q Guido Lorenzoni [and] Karl Walentin [electronic resource] Guido Lorenzoni

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Bookmark: http://trove.nla.gov.au/version/165655873
Physical Description
  • 31 p. :
Published
  • Cambridge, MA Massachusetts Institute of Technology, Dept. of Economics 2007
Language
  • English

Edition details

Title
  • Financial frictions investment and Tobin's q Guido Lorenzoni [and] Karl Walentin
Author
  • Guido Lorenzoni
Other Authors
  • Walentin, Karl
  • Massachusetts Institute of Technology. Dept. of Economics
Published
  • Cambridge, MA Massachusetts Institute of Technology, Dept. of Economics 2007
Medium
  • [electronic resource]
Physical Description
  • 31 p. :
Series
Summary
  • 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.
Notes
  • "April 25, 2007." Includes bibliographical references (p. 30-31). Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.
Language
  • English
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