On the Accuracy of Different Measures of q

30 Pages Posted: 19 Oct 2006  

Timothy Erickson

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

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Abstract

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

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

Timothy Erickson (Contact Author)

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

2 Massachusetts Avenue, NE
Postal Square Building, Room 3105
Washington, DC 20212
United States
202-691-6575 (Phone)
202-691-6583 (Fax)

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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