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The Q Theory of Investment with Private Benefits of Control, Soft Budget Constraints and Financial Constraints
Mykhayliv, Dariya Zauner, K.G.
Mykhayliv, Dariya
Zauner, K.G.
Publication Date
2015-12
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© 2015 The Authors. Reproduced by permission from the copyright holder.
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Abstract
In this paper, we extend Tobin’s Q model under financial frictions (Hennesy, Levy, and Whited, Journal of Financial Economics (2007)), using a discrete-time version of their model, to include private benefits of control of managers and other stakeholders and soft budget constraints in the form of money injections into the firm. Managers are not viewed to maximise shareholder value, but to maximise the value of their shareholding plus their private benefits of control. Private benefits of control introduce elements of asset stripping into the model. We characterize the optimal investment policy, analyse comparative statics and discuss applications to firms in transitional economies.
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Mykhayliv D and Zauner KG (2015) The Q Theory of Investment with Private Benefits of Control, Soft Budget Constraints and Financial Constraints. Working Paper. The Authors.
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