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

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

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

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)

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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