Tobin's q Does Not Measure Firm Performance: Theory, Empirics, and Alternatives
Event details
| Date | 20.11.2014 |
| Hour | 16:15 › 17:45 |
| Speaker | Phil DYBVIG (Washington University in St. Louis) |
| Location | |
| Category | Conferences - Seminars |
Tobin's q is often used to proxy for firm performance when studying the relation between corporate governance and firm performance. However, our theoretical and empirical analysis demonstrate that Tobin's q does not measure firm performance since underinvestment increases rather than decreases Tobin's q. As an alternative to Tobin's q, our theoretical framework provides two new operating efficiency measures: the first assesses scale efficiency and the second assesses cost discipline. These proxies, which are justified by the ideal of maximizing firm value net of invested capital, decompose Tobin's q and can be computed for a wide cross-section of firms using the same data. In a canonical governance-performance regression specification, these operating efficiency measures lead to a different conclusion than Tobin's q.
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