Download this Paper Open PDF in Browser

Financial Frictions Investment and Tobin's q

33 Pages Posted: 30 Apr 2007  

Guido Lorenzoni

Northwestern University; National Bureau of Economic Research (NBER)

Karl Walentin

Sveriges Riksbank

Multiple version iconThere are 3 versions of this paper

Date Written: April 25, 2007


We develop a model of investment with financial constraints and use it to investigate the relation between investment and Tobin's q. A firm is financed partly by insiders, who control its assets, and partly by outside investors. When their wealth is scarce, insiders earn a rate of return higher than the market rate of return, i.e., they receive a quasi-rent on invested capital. This rent is priced into the value of the firm, so Tobin's q is driven by two forces: changes in the value of invested capital, and changes in the value of the insiders' future rents per unit of capital. This weakens the correlation between q and investment, relative to the frictionless benchmark. We present a calibrated version of the model, which, due to this effect, generate realistic correlations between investment, q, and cash flow.

Keywords: Financial constraints, investment, Tobin's q, limited enforcement.

JEL Classification: E22, E30, E44, G30

Suggested Citation

Lorenzoni, Guido and Walentin, Karl, Financial Frictions Investment and Tobin's q (April 25, 2007). MIT Department of Economics Working Paper No. 07-16. Available at SSRN: or

Guido Lorenzoni (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Karl Walentin

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm


Paper statistics

Abstract Views