Seeking q: The Marginal Efficiency of Liquidity and Its Effect on Investment Financing and Valuation

66 Pages Posted: 4 Jan 2014 Last revised: 23 May 2016

See all articles by Thomas E. Copeland

Thomas E. Copeland

University of San Diego - School of Business Administration

Andrew Lyasoff

Boston University - Questrom School of Business

Date Written: February 8, 2014

Abstract

Just as portfolio managers are seeking positive alpha, corporate investors are seeking Tobin's q larger than 1. The present paper develops a quantitative framework in which this process can be analyzed, and prescriptions for concrete financing decisions can be obtained. Specifically, we focus on how firms finance -- and profit from -- investment projects for which they have exclusive rights. Methodologically, the paper adheres to the contingent-claims valuation framework, but with liquidity as one of the underlying fundamentals. We develop a pricing method, which is based on the general idea of dynamic programming and mimics Cox, Ross, and Rubinstein (1979).

Keywords: Corporate Finance, Corporate Investment, Capital Structure, Real Options

JEL Classification: G31, G32, G33, G34, G35, G38

Suggested Citation

Copeland, Thomas E. and Lyasoff, Andrew, Seeking q: The Marginal Efficiency of Liquidity and Its Effect on Investment Financing and Valuation (February 8, 2014). Available at SSRN: https://ssrn.com/abstract=2374485 or http://dx.doi.org/10.2139/ssrn.2374485

Thomas E. Copeland

University of San Diego - School of Business Administration ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

Andrew Lyasoff (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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