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

Imperial College London; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Hui Chen

Massachusetts Institute of Technology

Neng Wang

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

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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

Imperial College London ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Hui Chen (Contact Author)

Massachusetts Institute of Technology ( email )

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Neng Wang

Columbia University - Columbia Business School, Finance ( email )

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