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Tobin's Q as a measure of Firm value?


I'm currently working on a dissertation about the influence of voluntary disclosure on firm value of belgian listed companies. I am using Tobin's Q as my dependent variable. In prior research, Tobin's Q was defined as the market value of a company devived by its replacement costs of assets. In my research, i am using a different calcutation. I use:

market value of equity + book value of debts

book value of equity + book value of debts

I was wondering how i can correctly interpretate this formula. I know the interpretation of the normal Tobin's Q but I think it's not applicable in my case.

In my research for example, I found out that voluntary disclosure does effect tobin's q (measured in my way) positively. So when a company does disclose more information voluntarely, it's q ratio gets higher. My question is, how does voluntary disclosure effect the tobin's q ratio I used in my research and what is the reason behind it. Why does the market value suddenly change?

Thanks in advance!

May 22, 2013 by Dennis from Kiev, Kyi in  |  Flag
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Hi Dennis,

Ultimately both your measure of Tobin's Q and the traditional measure are expressing a ratio of the market value of a company relative to the accounting value. Swapping out book value of debt for market value of debt should not have a material impact on your study's conclusions, but they will vary slightly.

In your study, you will probably find that the public market value of most companies is quite divergent from the book value. There are many legitimate reasons that a company could trade at a premium or discount to its book value. The intrinsic value of a company (which the market value attempts to reflect) is based on the future potential of its business model. GAAP book value, however, is primarily a backward looking metric and therefore does not necessarily accurately capture the true value of a business.

In regards to your question on voluntary disclosure, I would say that you might be picking up some spurious correlation. It is possible that companies with more disclosure in their filings are generally viewed by the market as more trustworthy and therefore have higher valuations on average. However, in the scheme of the variables that determine a company's value, "voluntary disclosure" is a small part of the equation.

If you want to find a stronger correlation, I would suggest comparing Tobin's Q to ROE. Companies with high returns on capital will trade at meaningful premiums to book value because book value is not accurately capturing the economic value of the company's assets. Therefore companies with high returns on capital are likely to have high Tobin's Q ratios.

In the end, what you're really studying is the question: "How is a company's market value determined?" Unfortunately in order to answer this question we have to dig much deeper than accounting metrics.

Comment   |  Flag   |  May 25, 2013 from Santa Monica, CA

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