Alternative constructions of Tobin's q: An empirical comparison

Although Tobin's q is an attractive theoretical firm performance measure, its empirical construction is subject to considerable measurement error. In this paper we compare five estimators of q that range from a simple-to-construct estimator based on book-values to a relatively complex estimator based upon the methodology developed by Lindenberg and Ross (1981). We present comparisons of the means, medians and variances of the q estimates, and examine how robust sorting and regression results are to changes in the construction of q. We find that empirical results are sensitive to the method used to estimate Tobin's q. The simple-to-construct estimator produces empirical results that differ significantly from the alternative estimators. Among the other four estimators, one developed by Hall (1990) produces means that are higher and variances that are larger than the three alternative estimators, but does approximate those estimators in most of the empirical comparisons. Those three alternative q ratio estimators, furthermore, produce empirical results that are robust.