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Tobin’s q and corporate investment with a pandemic shock

Author

Listed:
  • Li, Shilin
  • Li, Tongtong
  • Yang, Jinqiang
  • Zhao, Siqi

Abstract

We analyze the impact of COVID-19 on investment by incorporating a stochastic transmission shock into the standard q theoretical framework. Our model suggests that the adjustment cost amplifies the negative pandemic shock to investment and decreases firm value. In particular, when the infection rate is low, the reduction in investment is higher for firms with low adjustment costs in that they are more sensitive to the infection rate. An optimistic expectation of the arrival rate of a vaccine reduces the probability of executing mitigation policy. Moreover, the uncertainty of the pandemic increases investment and enhances firm value during the pandemic regime.

Suggested Citation

  • Li, Shilin & Li, Tongtong & Yang, Jinqiang & Zhao, Siqi, 2021. "Tobin’s q and corporate investment with a pandemic shock," Economics Letters, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:ecolet:v:209:y:2021:i:c:s0165176521004183
    DOI: 10.1016/j.econlet.2021.110141
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    References listed on IDEAS

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    1. Leigh A. Riddick & Toni M. Whited, 2009. "The Corporate Propensity to Save," Journal of Finance, American Finance Association, vol. 64(4), pages 1729-1766, August.
    2. Eberly, Janice & Rebelo, Sergio & Vincent, Nicolas, 2012. "What explains the lagged-investment effect?," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 370-380.
    3. Daron Acemoglu & Victor Chernozhukov & Iván Werning & Michael D. Whinston, 2021. "Optimal Targeted Lockdowns in a Multigroup SIR Model," American Economic Review: Insights, American Economic Association, vol. 3(4), pages 487-502, December.
    4. Veronica Guerrieri & Guido Lorenzoni & Ludwig Straub & Iván Werning, 2022. "Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?," American Economic Review, American Economic Association, vol. 112(5), pages 1437-1474, May.
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    More about this item

    Keywords

    Adjustment costs; Pandemic risk; Mitigation policy; Corporate investment;
    All these keywords.

    JEL classification:

    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • G01 - Financial Economics - - General - - - Financial Crises
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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