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

50 Pages Posted: 19 Mar 2009 Last revised: 12 Jul 2011

See all articles by Patrick Bolton

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; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 8, 2011

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.

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

JEL Classification: G3, E22

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

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)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,270
Abstract Views
9,560
rank
12,917
PlumX Metrics