A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management
Coauthor(s): Hui Chen, Neng Wang.
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.
Source: Journal of Finance
Bolton, Patrick, Hui Chen, and Neng Wang. "A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management." Journal of Finance (forthcoming).