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Journal of Finance Vol. 66 No. 5 2011

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

Patrick Bolton1,2,3,4,5,6,7,8; Hui Chen1,2,3,4,5,6,7,8; Neng Wang9,7

1 Boston College · 2 Boston University · 3 Shanghai University · 4 Hong Kong University of Science and Technology · 5 American Finance Association · 6 Columbia University · 7 University of Hong Kong · 8 University of California, Berkeley · 9 Center for Economic and Policy Research

open access

Abstract

We propose a model of dynamic investment, financing, and risk management for financially constrained firms. 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 to the 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; and (3) liquidity management and derivatives hedging are complementary risk management tools.

DOI
10.1111/j.1540-6261.2011.01681.x
Volume
66
Issue
5
Pages
1545-1578
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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