Working Paper: NBER ID: w13092
Authors: Guido Lorenzoni; Karl Walentin
Abstract: 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.
Keywords: financial frictions; investment; Tobin's q; cash flow
JEL Codes: E22; E30; E44; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial constraints (H60) | investment (G31) |
| Tobin's q (G19) | investment (G31) |
| cash flow (E50) | investment (G31) |
| financial constraints (H60) | Tobin's q (G19) |
| average q (C39) | investment (G31) |
| marginal q (C21) | investment (G31) |
| financial constraints (H60) | average q (C39) |
| financial constraints (H60) | marginal q (C21) |