We present a dynamic model of investment and firm valuation under imperfect investor protection. We show that the controlling shareholder's incentives to pursue private benefits in the future lead to socially distorted investment. Distorted investment decision further lowers firm value beyond the direct value reduction effect of cash diversion. Our model implies that investment shall be predicted by cash flow even after controlling for marginal q, because cash flow serves as a proxy for agency costs. Moreover, investment-cash flow sensitivity is stronger under weaker investor protection. Our model also illustrates that outside shareholders' free-rider motives make the controlling shareholder optimally keep his ownership constant over time, consistent with the empirical evidence (La Porta et al. (1999)). In equilibrium, the entrepreneur's ownership is more concentrated under weaker investor protection.