On the measurement of Tobin's q

We examine the methods commonly employed to estimate Tobin's q ratios and find them to be flawed in design and arbitrary in implementation. We propose an alternative procedure which is both simpler and more accurate. The key to the procedure is an improved measure of fixed asset replacement cos...

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Bibliographic Details
Published in:Journal of financial economics 1997-04, Vol.44 (1), p.77-122
Main Authors: Lewellen, Wilbur G., Badrinath, S.G.
Format: Article
Language:English
Subjects:
Asset valuation
Corporate performance
Economic models
Economic performance
Financial economics
Firm theory
Fixed assets
Inflation
Replacement costs
Studies
Taxes
Valuation
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Summary:We examine the methods commonly employed to estimate Tobin's q ratios and find them to be flawed in design and arbitrary in implementation. We propose an alternative procedure which is both simpler and more accurate. The key to the procedure is an improved measure of fixed asset replacement costs, through the proper identification of the vintages of fixed assets that are in place for a firm. Application of this procedure to a large sample of nonfinancial corporations indicates that existing methods generally produce downward-biased measures of q and can result in errors in the ordering of firms by their q's.
ISSN:0304-405X
1879-2774
DOI:10.1016/S0304-405X(96)00013-X