Estimating Capital Investment with Financial Constraints: Comparison of Tobin’s q and Real Options Approaches
نویسنده
چکیده
This paper investigates irreversible investment with financial constraints by comparing two approaches based on Tobin's q and the real options theories. The paper examines capital investment in two distinct periods. Tobin's q approach shows different results between the two periods. However, the real options approach yields estimates which are similar for the two periods and compatible with theory. In point of fact, the real options approach shows that liquidity positively affects investment for financially constrained firms for both periods. Thus, in this paper, the real options approach is more appropriate to analyze irreversible investment with financial constraints than Tobin's q approach.
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