This study measures the existence and level of agency cost by four different measures that provide a comprehensive idea about the level and presence of agency cost in the PSX listed Pakistani firms: i) asset utilization ratio ii) interaction of free cash flow and growth iii) Discretionary expenditure ratio, and finally iv) Tobin's Q ratio.
The mean and median values for the Tobin's Q ratio was 1.262 and 0.964 respectively, while mean and median values of Tobin's Q ratio for the UK listed companies reported by Doukas, McKnight and Pantzalis (2005) are 2.192 and 1.400.
These attributes were: Tobin's q ratio
, intangible assets to total assets ratio (IntanTA), cash flow to sales ratio (CFsales), auditor opinion (AUOP), capital expenditure to property, plant & equipment ratio (CapInt), and advertising expense to sales ratio (AdvSale).
In this article, we'll look at two additional market valuation tools, Tobin's Q Ratio
and Robert Shiller's C.A.P.E.
Is there a significant relationship between debt ratio and Tobin's Q ratio
Several other studies also have tested the free cash flow hypothesis using the Tobin's q ratio
, which is defined as the ratio of a firm's market value to the replacement cost of assets.
Tobin's Q ratio
is defined as the market value of assets divided by replacement value of assets.
Ross, 1981, "Tobin's q Ratio
and Industrial Organization," Journal of Business (January), 1-32.
In order to test the hypotheses using the ratio of market value to replacement cost of assets (Tobin's q ratio
), we employed the proxy used by Lindenberg and Ross (1981) and by Smirlock, Gilligan and Marshall (1984).
Skandia AFS, an insurance company in Stockholm, Sweden, uses a variant of Tobin's Q ratio
to measure the value of ideas.
To evaluate the impact of ESOPs on firm performance, we examine how the Tobin's q ratio
, the market-to-book value ratio, and the return on assets (ROA) of the sponsoring firm change around the year of establishment or expansion of the ESOP.
Our procedure for estimating Tobin's q ratios
for each firm follows the Perfect and Wiles (1994) method: