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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?

FooBar
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Kenneth Chen
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  • Average or marginal Q? – BKay Oct 08 '15 at 15:12
  • 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. – Kenneth Chen Oct 11 '15 at 23:48
  • 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. – BKay Oct 12 '15 at 00:27
  • That sounds reasonable. Is there any good empirical reference I can consult from? – Kenneth Chen Oct 12 '15 at 00:50

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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.

BKay
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