Estimation of Tobinâs Q Investment Function with Financial Frictions

Shakeri, Abbas; Afhami, Maryam

Estimation of Tobinâs Q Investment Function with Financial Frictions

Authors

Abbas Shakeri ¹

Maryam Afhami ²

¹ Professor of Economics, Faculty of Economics, Allameh Tabatabaee University, Email: Shakeri.abbas@gmail.com

² Master of Economics, Faculty of Economics, Allameh Tabatabaee University, Email: Afhami1362@gmail.com

Abstract

The estimation of Tobin’s Q Investment function is the aim of the present paper. One of the most important challenges of investment for a firm is finance. In the real world, since there is no perfect capital market, the costs of financing through internal and external resources are not equal and friction problem occurs in investment decisions. In this paper, a dynamic investment model is estimated in context of Tobin’s Q theory. This model accounts for 3 identifiable financial frictions, i.e., convex costs of issuing equity, overhang from outstanding debt and collateral constraints. The model is estimated with reference to capital and financial markets in Iran based on Hennessy et al (2007) approach using panel data of 19 companies during 2000-2009. The GLS and GMM methods are used for estimating and comparing the models.

Keywords

Investment

Tobin’s Q

Finance

Financial friction

20.1001.1.17356768.1392.13.2.8.2

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