Data Management

A Unified Theory Of Tobin's Q, Corporate Investment, Financing, And Risk Management

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Executive Summary

This paper proposes a simple homogeneous dynamic model of investment and corporate risk management for a financially constrained firm. The authors define a corporation's risk management as the coordination of investment and financing decisions. In the model, corporate risk management involves internal liquidity management, financial hedging, and investment. The optimal cash inventory policy takes the form of a double-barrier policy where cash is paid out to shareholders only when the cash-capital ratio hits an endogenous upper barrier, and external funds are raised only when the firm has depleted its cash.

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