Investment, Tobin's q, and interest rates

Xiaoji Lin, Chong Wang, Neng Wang, Jinqiang Yang

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


We study the impact of stochastic interest rates and capital illiquidity on investment and firm value by incorporating 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). We find, consistent with our theory, that credit spreads and bond q have significant predictive powers on micro-level and aggregate investments corroborating the recent empirical work of Gilchrist and Zakrajšek (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, and the value of growth opportunities are substantial. These findings are particularly important in today's low interest rate environment.

Original languageEnglish (US)
Pages (from-to)620-640
Number of pages21
JournalJournal of Financial Economics
Issue number3
StatePublished - Dec 2018


  • Assets in place
  • Bond q
  • Capital adjustment costs
  • Growth opportunities
  • Term structure of interest rates

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