Tobin’s q | economics (2024)

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Many religions also offer their own views on the nature of good and evil, and they may prescribe guidelines and judgment on different kinds of human behavior.","image":{"id":0,"url":"/95/180595-050-EDF2CA3A.jpg","altText":"Philosophy & Religion","credit":null,"width":null,"height":null,"fullUrl":"https://cdn.britannica.com/95/180595-050-EDF2CA3A.jpg"}},"typeDisplayName":"Demystified"}]},"byline":null,"citationInfo":null,"websites":null,"freeTopicReason":"TOPIC_IS_INDEX_PAGE","articleSchemaMarkup":{"keywords":"Tobin’s q","wordcount":0,"url":"https://www.britannica.com/topic/Tobins-q","description":"Other articles where Tobin’s q is discussed: James Tobin: He introduced “Tobin’s q,” the ratio of the market value of an asset to its replacement cost. If an asset’s q is greater than one, then new investment in similar assets will be profitable.","publisher":{"name":"Encyclopedia Britannica","@type":"Organization","logo":{"url":"https://corporate.britannica.com/wp-content/themes/eb-corporate/_img/logo.png","@type":"ImageObject"}},"@context":"https://schema.org","@type":"article"},"studentArticle":false,"initialLoad":true}

Tobin’s q

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  • In James Tobin

    He introduced “Tobin’s q,” the ratio of the market value of an asset to its replacement cost. If an asset’s q is greater than one, then new investment in similar assets will be profitable.

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Tobin’s q | economics (2024)

FAQs

Tobin’s q | economics? ›

Tobin's Q formula is an economic ratio used to compare a company or index's market value to its book or replacement value. One way that the formula is expressed is as Q = Market Value / Total Assets. It can be used to measure the relative value of a company's stock or the overall market.

What does Tobin's Q indicate? ›

The Q ratio, also known as Tobin's Q, measures whether a firm or an aggregate market is relatively over- or undervalued. It relies on the concepts of market value and replacement value. The simplified Q ratio is the equity market value divided by equity book value.

What if Tobin's Q is greater than 1? ›

Components of Tobin's Q Ratio

When a firm's Q Ratio is more than 1, it means the market values the firm more than its asset cost, implying high growth and profit potential which may encourage further investment.

What is Tobin's theory? ›

Tobin's portfolio-selection theory is another of his contributions. He argued that investors balance high-risk, high-return investments with safer ones so as to achieve a balance in their portfolios. Tobin's insights helped pave the way for further work in finance theory.

What is the Tobin Q ratio today? ›

Tobin's Q is at a current level of 1.589, up from 1.450 last quarter and up from 1.350 one year ago. This is a change of 9.61% from last quarter and 17.71% from one year ago.

What is the effect of Tobin's Q? ›

Effect on capital investment

This suggests that the market value reflects some unmeasured or unrecorded assets of the company. High Tobin's q values encourage companies to invest more in capital because they are "worth" more than the price they paid for them.

Does Tobin's Q measure firm performance? ›

Tobin's q is often used to proxy for firm performance when studying the relation between corporate governance and firm performance.

What is a good q ratio? ›

The ideal scenario is when the Q Ratio equals 1. It suggests that the market fairly values the company's assets.

What is Tobin's Q for banks? ›

Tobin's Q predicts future cash flows in the cross-section of banks. That is, market values capture information that book values do not, and book values do not fully respond to shocks. Macro-finance models typically have implications for the dynamic behavior of bank leverage.

What is the difference between Tobin's Q and ROA? ›

As suggested by [5], ROA indicates how effectively companies' assets are used in order to serve shareholders' economic interests while Tobin's Q, as stated by [7], stands for “a market measure of firm value that is forward-looking, risk-adjusted, and less susceptible to changes in accounting practices”.

Can Tobin's Q be negative? ›

No, it is not possible for Tobin's Q to be negative in any normal situation. Mathematically it is true that if the 'short term assets' figure is very large (because of a data error or otherwise) the numerator of the fraction could become negative.

What is Tobin's Q-theory of demand for money? ›

Tobin in his Q-theory connected the level of investment expenditure with stock prices. In 1969 he defined the variable q as the share of the market value of an enterprise (the sum of share pri- ces) and the replacement cost of capital.

What is the average Q ratio? ›

Average Q is usually calculated as the ratio of the aggregate market value of the firm to replacement cost. The aggregate market value of each firm is the sum of the market values of equity and debt.

What does a high Tobin's Q mean? ›

A Tobin's Q ratio above 1 means that a company's current market value is higher than its total asset value. This could indicate many things, such as the potential for future growth or that the company is being overvalued by the market.

What is the normal range of Tobin Q? ›

Tobin Q : 1.59 (As of 2023-10-01)

Tobin Q was 1.59 as of 2023-10-01, according to Investopedia. Historically, Tobin Q reached a record high of 2.15 and a record low of 0.28, the median value is 0.76. Typical value range is from 1.09 to 1.67.

How to get Tobin's Q data? ›

The 'simple' version of Tobin's q is the market value of assets / book value of assets => q = (cshoc * prccd - ceq + at)/at (please doublecheck formula; it assumes that the market value of liabilities is equal to the book value of liabilities).

What is Tobin's marginal Q and average Q? ›

Average Q is calculated as the ratio of the market value of the firm to replacement cost. Marginal Q is the ratio of the abnormal return due to an investment announcement and the announced percentage change in investment plus one.

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