Investment, Tobin's q, and Interest Rates

Charles A. Dice Center Working Paper No. 2016-20

Fisher College of Business Working Paper No. 2016-03-020

48 Pages Posted: 4 Nov 2016  

Xiaoji Lin

Ohio State University (OSU) - Fisher College of Business

Chong Wang

Naval Postgraduate School - Graduate School of Business and Public Policy

Neng Wang

Columbia University; China Academy of Financial Research (CAFR)

Jinqiang Yang

Shanghai University of Finance and Economics

Date Written: October 23, 2016

Abstract

To study the impact of stochastic interest rates and capital illiquidity on investment and firm value, we incorporate a widely-used arbitrage-free term structure model of interest rates into a standard q-theoretic framework. Our generalized q model informs us to use corporate credit-risk information to predict investments when empirical measurement issues of Tobin’s average q are significant (e.g., equity is much more likely to be mis-priced than debt) as in Philippon (2009). Consistent with our theory, we find that credit spreads and bond q have significant predictive powers on micro-level and aggregate investments corroborating the recent empirical work of Gilchrist and Zakrajˇsek (2012). We also show that the quantitative effects of the stochastic interest rates and capital illiquidity on investment, Tobin’s average q, the duration and user cost of capital, as well as the value of growth opportunities are substantial. These findings are particularly important in today’s low interest-rate environment.

Keywords: term structure of interest rates; capital adjustment costs; average q; marginal q; duration; assets in place; growth opportunities; bond q

JEL Classification: G31, G12, E2

Suggested Citation

Lin, Xiaoji and Wang, Chong and Wang, Neng and Yang, Jinqiang, Investment, Tobin's q, and Interest Rates (October 23, 2016). Charles A. Dice Center Working Paper No. 2016-20; Fisher College of Business Working Paper No. 2016-03-020. Available at SSRN: https://ssrn.com/abstract=2862643 or http://dx.doi.org/10.2139/ssrn.2862643

Xiaoji Lin (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Chong Wang

Naval Postgraduate School - Graduate School of Business and Public Policy ( email )

555 Dyer Road
Monterey, CA 93943
United States

Neng Wang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Jinqiang Yang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

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