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Tobin's-qTobin's-q or simply q compares the value of a company given by financial markets with the value of a company's assets. It is claimed to be a measure of intellectual capital. It was developed by James Tobin (Tobin 1969). It is calculated by dividing the market value of a company by the replacement value of its assets: - Tobin's-q =
Another use for q is to deterimine the valuation of the market as a whole. The formula for this q is: If the market value reflected solely the recorded assets of a company, Tobin's-q would be 1. Tobin's-q is a mean reverting ratio which tends to return to .63 . If Tobin's-q is greater than 1, then the market value is greater than the value of the company's recorded assets. 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. On the other hand if Tobin's-q is less than 1, the market value is less than the recorded value of the assets of the company. This suggests that the market may be undervaluing the company. Tobin's-q reflects a number of variables, and in particular: - The recorded assets of the company.
- Market sentiment, reflecting, for example, analysts' views of the prospects for the company, or speculation such as bid rumours.
- The intellectual capital of the company.
Since Tobin's-q reflects a number of variables it can only be an approximation of the value of intellectual capital. Many companies now seek to develop ways to measure intangible assets such as intellectual capital. See balanced scorecard. Tobin's marginal q Tobin's marginal q is the ratio of the change in the value of the firm to the added capital cost for an increment to the capital stock. See Also Sources - Tobin J. (1965) "A general equilibrium approach to monetary theory", Journal of Money Credit and Banking, Vol 1No 1 pp 15-29
- Smithers, Andrew; & Wright, Stephen (2000). Valuing Wall Street: Protecting Wealth in Turbuluent Markets. McGraw-Hill. ISBN 0-07-135461-1
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