Tobin's Q Ratio

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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 ?
[H.sub.1]: There is no statistically significant difference in Tobin's q ratios between "pre-crisis" and "post-crisis " years.
Pre-crisis period had larger Tobin's q ratios than the post-crisis period.
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).
Perfect, Peterson, and Peterson (1995) also examine 101 tender offer repurchases made during 1978 to 1990 and find that the empirical results are sensitive to how the Tobin's q ratios are calculated.
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.
In this paper we reexamine the free cash flow hypothesis using the Tobin's q ratio of repurchasing firms and using a broad US stock repurchase data from 1994 to 2007.
We conclude that, on average, the marginal and average Tobin's Q ratios differ for firms in the sample.
Ross, 1981, "Tobin's q Ratio and Industrial Organization," Journal of Business (January), 1-32.
Our procedure for estimating Tobin's q ratios for each firm follows the Perfect and Wiles (1994) method:
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.
We use three long-term performance measures: the m/b ratio, Tobin's q ratio, and ROA.
Table 3 reports the increase (and excess increase) in the m/b ratio, Tobin's q ratio, and the ROA of block and non-block ESOP firms from year t - 1 to the subsequent years.