Tobin's q Does Not Measure Firm Performance: Theory, Empirics, and Alternatives

39 Pages Posted: 3 Mar 2010 Last revised: 6 Mar 2015

See all articles by Philip H. Dybvig

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School

Mitch Warachka

Chapman University

Date Written: March 5, 2015

Abstract

Tobin's q is often used to proxy for firm performance when studying the relation between corporate governance and firm performance. However, our theoretical and empirical analysis demonstrate that Tobin's q does not measure firm performance since underinvestment increases rather than decreases Tobin's q. As an alternative to Tobin's q, our theoretical framework provides two new operating efficiency measures: the first assesses scale efficiency and the second assesses cost discipline. These proxies are justified by the ideal of maximizing firm value net of invested capital, and can be computed for a wide cross-section of firms. In a canonical governance-performance regression specification, our operating efficiency measures lead to a different conclusion than Tobin's q.

Keywords: Firm Performance, Corporate Governance, Tobin's q, Operating Efficiency

JEL Classification: G34

Suggested Citation

Dybvig, Philip H. and Warachka, Mitch, Tobin's q Does Not Measure Firm Performance: Theory, Empirics, and Alternatives (March 5, 2015). Available at SSRN: https://ssrn.com/abstract=1562444 or http://dx.doi.org/10.2139/ssrn.1562444

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Mitch Warachka (Contact Author)

Chapman University ( email )

Orange, CA 92866
United States

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