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

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.