Financial Frictions, Investment and Tobin's q / Guido Lorenzoni, Karl Walentin.

Format:

Book

Author/Creator:

Lorenzoni, Guido.

Contributor:

National Bureau of Economic Research.

Walentin, Karl.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13092.

NBER working paper series no. w13092

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

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, generates realistic correlations between investment, q, and cash flow.

Notes:

Print version record

May 2007.