Q
Tobin's q compares the value of a company given by financial markets with the value of a company's assets. It is calculated by dividing the market value of a company by the replacement value of its assets:
Tobin's q = market value / asset value
Another use for q is to determine the valuation of the market as a whole. The formula for this q is:
value of stock market / corporate net worth
Application:
If the market value reflected solely the recorded assets of a company, Tobin's q would be 1.0.
If Tobin's q is greater than 1.0, 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.
Variables:
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 rumors.
* 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.
