"q" and the Theory of Investment

The ratio of the financial market valuation of a real capital asset to the replacement cost of the asset is denoted by "q." Theoretically, when this ratio is greater than one, there is an inducement for investment in the asset. The logical extension of this concept is the combining of the...

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Bibliographic Details
Published in:The Journal of finance (New York) 1979-05, Vol.34 (2), p.535-547
Main Authors: CICCOLO, JOHN, FROMM, GARY
Format: Article
Language:English
Subjects:
Assets
Capital assets
Capital costs
Capital investments
Capital stocks
Capital structure
Debt
Decision analysis
Economic theory
Equity
Financial investments
Financing
Investment portfolios
Investment return rates
Investment risk
Investments
Ratios
Session Topic: The Channels of Influence of Tobin-Brainard's `Q' on Investment
Theory
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Summary:The ratio of the financial market valuation of a real capital asset to the replacement cost of the asset is denoted by "q." Theoretically, when this ratio is greater than one, there is an inducement for investment in the asset. The logical extension of this concept is the combining of the economic evaluation of the asset and the financing into a total decision package. The economic evaluation of the asset can be shown by a neoclassical investment model which defines market value in terms of the output price, output quantity, labor wages, opportunity cost of capital, depreciation factor, and the relative change in the price of capital goods. The cost of funds to finance an asset is largely determined by the capital structure with the cost of capital increasing as leverage and risk increase. Reasonable assessments of project profitability must consider both factors to give a total picture.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1979.tb02120.x