Economics
Tobin's Q
Tobin's Q is a ratio used to assess the value of a company by comparing its market value to the replacement cost of its assets. It is calculated by dividing the market value of a company by the replacement cost of its assets. If Tobin's Q is greater than 1, it suggests that the market values the company's assets more highly than their replacement cost, indicating potential overvaluation.
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3 Key excerpts on "Tobin's Q"
eBook - ePubThe Knowledge Growth Regime
A Schumpeterian Approach
- Cristiano Antonelli(Author)
- 2019(Publication Date)
- Palgrave Pivot(Publisher)
exhaustibility of knowledge, is larger than expected in equilibrium conditions.Tobin’s q substitutes the TFP . The two measures can be considered two alternative indicators of the effects of out-of-equilibrium conditions engendered by innovation . As a matter of fact, both the Tobin’s q and the TFP reflect and measure the effects of the introduction of innovations on the equilibrium conditions of product and factor markets . More specifically, as Antonelli and Colombelli (2011a ) show, the out-of-equilibrium conditions engendered by TFP are the cause of Tobin’ q values. Yet the working of financial markets , measured by the Tobin’s q , leads to the actual substitution of TFP. The larger is the Tobin’s q and the lower are the TFP levels for downstream users , i.e., the rest of the economy.Firms able to generate new technological and organizational knowledge at costs below equilibrium because of its limited exhaustibility and appropriability , to use it to implement a creative response to out-of-equilibrium conditions in their product and factor markets and introduce technological and organizational innovations and to appropriate their economic benefits, are able to produce more output with given levels of inputs. Output levels that are larger than expected equilibrium levels are the cause of performances above equilibrium levels and specifically larger profits . Profits above equilibrium engender the increase of the market value of the shares of the innovative firm (Antonelli 2017
eBook - ePubReal Estate Economics
A Point-to-Point Handbook
- Nicholas G Pirounakis, Nicholas G. Pirounakis(Authors)
- 2013(Publication Date)
- Routledge(Publisher)
If the increase is sufficiently large, developers will build new ones. Jud and Winkler (2003) provided empirical evidence in favour of Tobin's Q in their study of housing investment in the USA from 1979 to 2000. The Tobin's Q they used in order to conduct their study was defined in the following way: where OFHEO is the Office of Federal Housing Enterprise Oversight. 15 The ratio was then compared with building permits, housing starts, and housing investment expenditures over the period of study. Using co-integration analysis, the authors concluded that ‘the housing market indeed functions as Tobin has theorized. Housing suppliers appear to respond to the demands of housing consumers, building more new homes when existing home prices are high relative to new home prices’ (Jud and Winkler, 2002: 2). A strong link between Tobin's Q and housing investment was also identified by Deichmann Haagerup (2009) in his study of Danish single-family houses from 1968 to 2008. If properly calculated, a q > 1 is supposed to encourage property investment, for it means that there are profits to be had, as cost of construction and land, i.e., the replacement cost of real estate, is less than the price at which property will expectedly sell. Tobin's Q, however, seems to conflict with the empirical observation that new properties often sell for more than older properties (Corgel, 1997)
eBook - ePub- Craig Allan Medlen(Author)
- 2018(Publication Date)
- Routledge(Publisher)
additional stock valuation divided by the new investment that presumably accounts for the additional stock valuation. Brainard and Tobin never attempted to measure marginal Q perhaps because of their belief that “for short-run variations of aggregate demand, we can expect that the same factors which raise or lower [Q] on the margin likewise raise or lower [Q] on average” (Brainard and Tobin, 1977, p. 243). But this correspondence is far from certain. An explanation of why marginal Q might decline during stock market booms or at least be subject to dampening forces could account for the fact that mergers become relatively more attractive than new investment during those same booms. But if such an explanation were available, Q theory would have to be turned on its head: the theory would then predict that stock market booms may inhibit new investment over and above the levels that would otherwise obtain. In other than the rarified case of pure competition, where under certain conditions marginal Q reduces to average Q (Hayashi, 1982), or in the similarly rarified case that assumes homogeneity of capital and disembodied change (Able and Blanchard, 1986), marginal Q has defied estimation.Unlike Q, marginal Q is an elusive variable as the change in stock valuation resulting from new investment is unobservable. To observe marginal Q, one would have to know what the stock valuation would have been in the absence of new investment so as to calculate the difference. Nevertheless, if we assume that changes in stock valuation reflect the anticipated rate of return on new investment we can, with the aid of relative valuation, sketch out the general movement of marginal Q. As will be demonstrated, this general movement has declined over time, even when average Q has expanded. I argue below that such a decline helps us to understand the general decline in rates of corporate investment growth at least since the late 1960s.
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