On the long-run equilibrium value of Tobin’s average Q

Reiner Franke and Boyan Yanovski
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Reiner Franke: University of Kiel, Germany
Boyan Yanovski: University of Kiel, Germany

European Journal of Economics and Economic Policies: Intervention, 2016, vol. 13, issue 1, 103-113

Abstract: This note considers Tobin's average Q in a framework where firms finance investment by equities and debt. The determination of its long-run equilibrium value Q° is based on positing equality of the loan rate and, adjusted for a risk premium, the return on equities. Q° can thus be characterized as a ratio of two rates representing the somewhat modified interest costs and profits of the firms. The familiar benchmark value Q° = 1 obtains if another condition on the risk premium holds true, which may or may not be the case. An elementary numerical check demonstrates that possible deviations of Q° from unity are not overly dramatic.

Keywords: Tobin’s average Q; debt and equity financing; no-arbitrage condition; fundamentalist trader (search for similar items in EconPapers)
JEL-codes: C02 D84 E12 E30 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:elg:ejeepi:v:13:y:2016:i:1:p103-113

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