A Unified Theory of Tobin's Q, Corporate Investment, Financing, and Risk Management
Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Massachusetts Institute of Technology
Columbia Business School - Finance and Economics
February 8, 2011
Journal of Finance, Forthcoming
AFA 2010 Atlanta Meetings Paper
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, E22Accepted Paper Series
Date posted: March 19, 2009 ; Last revised: July 12, 2011
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