Construct · 1 fields · 3 citations

Tobin's q: a standalone construct

One name. One construct. A landmark on the map.

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Tobin's q1 CONSTRUCTTobin's qBRAINARD-TOBIN · q RATIO

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Economics and finance

The ratio of a firm's market value to its assets' replacement cost

William Brainard and James Tobin introduced the ratio in their 1968 American Economic Review paper on financial model building, and Tobin developed it as the variable q in his 1969 general-equilibrium account of monetary theory, where it links financial markets to real investment. The q ratio is the market value of a firm, or of an economy's whole capital stock, divided by the replacement cost of its physical assets, that is, what it would cost to rebuild those assets from scratch. When q is above one the market values existing capital at more than it costs to replace, which rewards new investment, and when q is below one replacement is discouraged, so the ratio ties a firm's investment behaviour to how financial markets price it. Eric Lindenberg and Stephen Ross carried the measure to the firm level in 1981, showing how to estimate replacement costs from accounting data and turning q into a widely used variable in corporate finance and industrial organisation. Because it sets a forward-looking market valuation against a backward-looking asset cost in a single number, Tobin's q remains a standard gauge of investment opportunity, market power, and how efficiently capital is deployed.[1][2][3]

Unit
A dimensionless ratio (market value divided by replacement cost), near one at equilibrium
Recovery means
Not applicable
Measured by
Computed as the market value of a firm or capital stock divided by the estimated replacement cost of its physical assets; firm-level studies proxy the hard-to-observe replacement cost from accounting and market data

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Nearby constructs

valuation4 fields · 7 citationsjingle · one word, four constructscapital2 fields · 3 citationsjingle · one word, two constructsasset2 fields · 2 citationsjingle · one word, two constructs

References

  1. Brainard, W. C., & Tobin, J. (1968). Pitfalls in financial model building. The American Economic Review, 58(2), 99–122.
  2. Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), 15–29. https://doi.org/10.2307/1991374
  3. Lindenberg, E. B., & Ross, S. A. (1981). Tobin's q ratio and industrial organization. Journal of Business, 54(1), 1–32. https://doi.org/10.1086/296120

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