What is the Tobin Q ratio?

Tobin's Q, or the Tobin Q Ratio, is the market value of a security or market divided by its asset replacement cost. It's sometimes referred to by the shorthand q ratio. The ratio was popularized in the 1970s by Yale's James Tobin. He theorized that securities' market value divided by their replacement cost should roughly find equilibrium around 1.

What is Tobin's Q a?

Tobin's q [a] (or the q ratio, and 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 paper: Marginal Productivity and the Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani.

What is Tobin's marginal q?

Tobin's marginal q is the ratio of the market value of an additional unit of capital to its replacement cost. In inflationary times, q will be lower than the price-to-book ratio.

Is a high or low Tobin's Q good?

There is no simple answer as to whether a high or low Tobin's Q is good. Generally, a high ratio may indicate that the company or market is experiencing a period of overvaluation. However, in some cases the market may be pricing in future growth potential or intangible assets that Tobin's Q does not easily account for.