Abstract

http://ssrn.com/abstract=1364964
 
 

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A Unified Theory of Tobin's Q, Corporate Investment, Financing, and Risk Management


Patrick Bolton


Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Hui Chen


Massachusetts Institute of Technology; National Bureau of Economic Research (NBER)

Neng Wang


Columbia Business School - Finance and Economics

February 8, 2011

Journal of Finance, Forthcoming
AFA 2010 Atlanta Meetings Paper

Abstract:     
We propose a model of dynamic corporate investment, financing, and risk management for a financially constrained firm. 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 and 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; 3) liquidity management and derivatives hedging are complementary risk-management tools.

Number of Pages in PDF File: 50

Keywords: investment, q theory, cash management, liquidity, hedging, payout, financing

JEL Classification: G3, E22

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Date posted: March 19, 2009 ; Last revised: July 12, 2011

Suggested Citation

Bolton, Patrick and Chen, Hui and Wang, Neng, A Unified Theory of Tobin's Q, Corporate Investment, Financing, and Risk Management (February 8, 2011). Journal of Finance, Forthcoming ; AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1364964

Contact Information

Patrick Bolton
Columbia Business School - Department of Economics ( email )
420 West 118th Street
New York, NY 10027
United States
HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Hui Chen (Contact Author)
Massachusetts Institute of Technology ( email )
50 Memorial Drive
Cambridge, MA 02142
United States
617-324-3896 (Phone)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Neng Wang
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

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