30 Pages Posted: 19 Oct 2006
Tobin's q is widely accepted as a 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 article 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. Using elaborate algorithms, however, depletes the number of usable observations and possibly introduces sample selection bias.
JEL Classification: G31, C13
Suggested Citation: Suggested Citation
Erickson, Timothy and Whited, Toni M., On the Accuracy of Different Measures of q. Financial Management, Vol. 35, No. 3, Autumn 2006. Available at SSRN: https://ssrn.com/abstract=938718
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