How do people calculate Tobin'q empirically?

Does anyone use it to make investment decisions? In particular, the version I learnt has no company debt involved with only capital under consideration, will this affect empirical research?

  • $\begingroup$ Average or marginal Q? $\endgroup$ – BKay Oct 8 '15 at 15:12
  • $\begingroup$ I don't know there's a Average and Marginal Q. I'm taking a course in Graduate MacroEcon, the Q we covered was equivalent to the Market to Book ratio of the market. $\endgroup$ – Kenneth Chen Oct 11 '15 at 23:48
  • $\begingroup$ That's average Q. Q is the ratio of an asset's market value to the replacement cost of that asset. In some macro finance models a firm makes marginal investments until the market value of an additional investment exactly equals its replacement cost. This gives a marginal Q of 1. But along the way initial investments would be higher than one (diminishing marginal value of capital). So even if all firms had a marginal Q of 1 they might have very different average Q. $\endgroup$ – BKay Oct 12 '15 at 0:27
  • $\begingroup$ That sounds reasonable. Is there any good empirical reference I can consult from? $\endgroup$ – Kenneth Chen Oct 12 '15 at 0:50

If you are interested in Tobin's (average) q, you might find useful A Simple Approximation of Tobin's q (Chung and Pruitt (1994)). That paper has a highly accurate approximation for Tobin's Q using Compustat. While the JSTOR copy I linked to is pay-walled, other versions appear not to be.


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