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





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    • Bolton is at Columbia University, NBER, and CEPR. Chen is at MIT Sloan School of Management and NBER. Wang is at Columbia University, NBER, and Shanghai University of Finance & Economics. We are grateful to Andrew Abel, Peter DeMarzo, Janice Eberly, Andrea Eisfeldt, Mike Faulkender, Michael Fishman, Xavier Gabaix, John Graham, Dirk Hackbarth, Cam Harvey, Christopher Hennessy, Pete Kyle, Yelena Larkin, Robert McDonald, Stewart Myers, Marco Pagano, Gordon Phillips, Robert Pindyck, Adriano Rampini, David Scharfstein, Jiang Wang, Toni Whited, two anonymous referees, and seminar participants at Boston College, Boston University, Columbia Business School, Duke, MIT Sloan, NYU Stern and NYU Economics, University of California at Berkeley, Yale, Maryland, Northwestern, Princeton, Lancaster, Virginia, IMF, Hong Kong University of Science and Technology Finance Symposium, Arizona State University, American Finance Association Meeting, the Caesarea Center 6th Annual Academic Conference, European Summer Symposium on Financial Markets, and Foundation for the Advancement of Research in Financial Economics for their comments.


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.