A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management
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Chen_A Unified.pdf
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Author(s) • •
Bolton, Patrick
Wang, Neng
Chen, Hui
Date Issued
September 2011
Journal
Journal of Finance
Publisher
American Finance Association
Citation
Bolton, Patrick, Hui Chen, and Neng Wang. “A Unified Theory of Tobin’s q, Corporate Investment, Financing, and Risk Management.” The Journal of Finance 66 (2011): 1545-1578. Web. 9 Dec. 2011.
Version
Author's final manuscript
Abstract
We propose a model of dynamic investment, financing, and risk management for financially constrained firms. The model highlights the central importance of the endogenous marginal value of liquidity (cash and credit line) for corporate decisions. Our three main results are: (1) investment depends on the ratio of marginal q to the marginal value of liquidity, and the relation between investment and marginal q changes with the marginal source of funding; (2) optimal external financing and payout are characterized by an endogenous double-barrier policy for the firm's cash-capital ratio; and (3) liquidity management and derivatives hedging are complementary risk management tools.
MIT Department
Sloan School of Management
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Creative Commons Attribution-Noncommercial-Share Alike 3.0
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DOI of Published Version
https://doi.org/10.1111/j.1540-6261.2011.01681.x