Investment, Tobin's q, and interest rates
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Authors
Lin, Xiaoji
Wang, Chong
Wang, Neng
Yang, Jinqiang
Subjects
term structure of interest rates
capital adjustment costs
average q
marginal q
duration
assets in place
growth opportunities
bond q
capital adjustment costs
average q
marginal q
duration
assets in place
growth opportunities
bond q
Advisors
Date of Issue
2017-09-18
Date
September 18, 2017
Publisher
Elsevier
Language
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.
Type
Article
Description
Preprint version
Series/Report No
Department
Organization
Naval Postgraduate School (U.S.)
Identifiers
NPS Report Number
Sponsors
Funding
Format
47 p.
Citation
Xiaoji Lin et all. "Investment, Tobin’s q, and interest rates." Journal of Financial Economics
Volume 130, Issue 3, December 2018, Pages 620-640.
Distribution Statement
Rights
This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.