On the Information Content of Different Measures of Q

37 Pages Posted: 16 Aug 2001

See all articles by Toni M. Whited

Toni M. Whited

University of Michigan, Department of Economics; National Bureau of Economic Research

Timothy Erickson

U.S. Department of Labor - Bureau of Labor Statistics

Date Written: August 2, 2001

Abstract

Tobin's q is widely accepted as proxy for an underlying "true" q, which is assumed to characterize a firm's incentive to invest. Researchers have developed numerous methods for computing q. This paper assesses the measurement quality of different proxies for q. We adapt the measurement-error consistent estimators in Erickson and Whited (2002) to estimate the extent to which variation in true unobservable q explains variation in different proxies for q. We find most proxies for q are poor: careful algorithms for calculating q do little to improve measurement quality. However, using elaborate algorithms depletes the number of usable observations and possibly introduces sample selection bias.

Keywords: Tobin's q, investment, measurement-error bias, high order moments

JEL Classification: G31, E2

Suggested Citation

Whited, Toni M. and Erickson, Timothy, On the Information Content of Different Measures of Q (August 2, 2001). Available at SSRN: https://ssrn.com/abstract=279315 or http://dx.doi.org/10.2139/ssrn.279315

Toni M. Whited (Contact Author)

University of Michigan, Department of Economics ( email )

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Timothy Erickson

U.S. Department of Labor - Bureau of Labor Statistics ( email )

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