Tobin's Q Ratio

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.
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References in periodicals archive ?
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: