Tobin's Q


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Tobin's Q

Market value of assets divided by replacement value of assets. A Tobin's Q ratio greater than 1 indicates the firm has done well with its investment decisions. Named after James Tobin, Yale University economist.

Tobin's Q Ratio

A ratio of a company's market value to its total asset value. Tobin's Q ratio is based on the work of James Tobin, who suggested that a fairly priced company ought to have a price equal to its total asset value. Thus, when Tobin's Q ratio is less than one, it means that the market value of the company is less than the total asset value, indicating that it is undervalued. Likewise, when it is more than one, it indicates that the market value is higher than the total asset value and that the company might be overvalued. Tobin's Q ratio is also called simply a Q ratio.

Tobin's Q

See Q ratio.
References in periodicals archive ?
Further, the market response is especially favorable for firms with overinvestment problems as measured by Tobin's q, and is not related to signaling costs as measured by the size of the repurchase.
In studying how investors interpret the reasons for the actual share repurchases, we follow Lang and Litzenberger (1989), who use Tobin's q to identify overinvesting firms.
We use two proxies, Tobin's q and the size of share repurchases, to distinguish between the free cash flow and the information-signaling hypotheses.
Share repurchases, the clustering problem, and the free cash flow hypothesis
The story told by Tobin's q is, perhaps, overly stylized.
Nonetheless, the basic intuition underlying Tobin's q is compelling: Changes in stock prices should serve as a signal to firms' managers.
Tobin's q theory would suggest that the fall would occur the instant that firms' qs fall below one, but given the fact that many investment projects take several quarters to complete, the fall in investment would likely be somewhat more gradual.
Why policymakers might care about stock market bubbles
In addition, our source of replacement cost data is superior to that used in most studies which use Tobin's Q.
We conclude that, on average, the marginal and average Tobin's Q ratios differ for firms in the sample.
A comparison of marginal and average Tobin's Q ratios
6) Tobin's q increases as more of a firm's value is due to growth options, i.
The other essential data observations needed for our hypotheses tests are the Tobin's q and market share of industry revenue data.
The relative importance of competition and contagion in intra-industry information transfers: an investigation of dividend announcements
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