Tobin's q-Ratio and Market Reaction to Capital Investment Announcements

Laurence E Blose and Joseph C P Shieh

The Financial Review, 1997, vol. 32, issue 3, 449-76

Abstract: There is a significant positive relation between Tobin's q-ratio and the magnitude of stock market reaction to capital investment announcements. The findings have the following implications for capital investment theory: (i) the results provide evidence substantiating the link between the q-ratio and real investment for industrial firms. For public utilities however, no such link exists. (ii) The study finds that average q and marginal q are correlated but the relation is somewhat more complicated than simple quality as assumed by numerous empirical studies. (iii) The findings suggest that investors can use average Tobin's q-ratio to identify companies with profitable real capital investment opportunities. Copyright 1997 by MIT Press.

Date: 1997
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