50 Pages Posted: 19 Mar 2009 Last revised: 12 Jul 2011
Date Written: February 8, 2011
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.
Keywords: investment, q theory, cash management, liquidity, hedging, payout, financing
JEL Classification: G3, E22
Suggested Citation: 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: https://ssrn.com/abstract=1364964
By Amir Sufi