Tobin's q
Tobin's q (also known as Kaldor's v ) is the ratio between a physical asset's market value and its replacement value. It was first introduced by Nicholas Kaldor in 1966 in his article "Marginal Productivity and the Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani". It was then reintroduced in 1968 by James Tobin and William Brainard, although the use of the letter "q" did not appear until Tobin's 1969 article "A general equilibrium approach to monetary theory". Tobin (1977) writes
One, the numerator, is the market valuation: the going price in the market for exchanging existing assets. The other, the denominator, is the replacement or reproduction cost: the price in the market for the newly produced commodities. We believe that this ratio has considerable macroeconomic significance and usefulness, as the nexus between financial markets and markets for goods and services.
Although it is not the direct equivalent of Tobin's q, it has become common practice in the finance literature to calculate the ratio by comparing the market value of a company's equity and liabilities with its corresponding book values as the replacement values of a company's assets is hard to estimate:
It is also common practise to assume equivalence of the liabilities market and book value, yielding:
For stock listed companies, the market value of equity is often quoted in financial databases. It can be calculated for a specific point in time by .
Another use for q is to determine the valuation of the whole market in ratio to the aggregate corporate assets. The formula for this is:
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