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Tobin's Q and shareholder value: Does “shareholder return” impede investment?

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  • Nicolas Piluso

    (CERTOP - Centre d'Etude et de Recherche Travail Organisation Pouvoir - UT2J - Université Toulouse - Jean Jaurès - UT - Université de Toulouse - UT3 - Université Toulouse III - Paul Sabatier - UT - Université de Toulouse - CNRS - Centre National de la Recherche Scientifique, IUT Paul Sabatier - Institut Universitaire de Technologie - Paul Sabatier - UT3 - Université Toulouse III - Paul Sabatier - UT - Université de Toulouse)

Abstract

Many economists have demonstrated that shareholder return constraints can negatively affect investment managers' decisions. While most studies are empirical, their findings are mixed. The real options literature provides a theoretical foundation for why a simple net present value rule based on a firm's cost of capital could lead to either insufficient investment or excessive investment. This study analyzes how the pursuit of shareholder value impacts optimal investments using Tobin's Q model in perfect competition. The study demonstrates that Tobin's Q, modified by shareholder constraints, can either hinder or promote optimal investment, thereby explaining the divergent results of empirical studies on this issue.

Suggested Citation

  • Nicolas Piluso, 2024. "Tobin's Q and shareholder value: Does “shareholder return” impede investment?," Post-Print hal-04699405, HAL.
    • Handle: RePEc:hal:journl:hal-04699405
    DOI: 10.1002/rfe.1214
    Note: View the original document on HAL open archive server: https://hal.science/hal-04699405v1
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    References listed on IDEAS

    as
    1. Joel Rabinovich, 2019. "The financialization of the non‐financial corporation. A critique to the financial turn of accumulation hypothesis," Metroeconomica, Wiley Blackwell, vol. 70(4), pages 738-775, November.
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    7. Roberto Veneziani & Luca Zamparelli & Leila E. Davis, 2017. "Financialization And Investment: A Survey Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1332-1358, December.
    8. Leila Davis, 2018. "Financialization, Shareholder Orientation and the Cash Holdings of US Corporations," Review of Political Economy, Taylor & Francis Journals, vol. 30(1), pages 1-27, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Investment Choice; Shareholder value; Tobin's Q; CAPM;
    All these keywords.

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