16.5 Tobin’s Q
Traditional Tobin’s q (V. R. Rao, Agarwal, and Dahlhoff 2004)
\[ q = \frac{MVE + PS + DEBT}{TA} \]
where
MVE = share price x number of common stock outstanding
PS = liquidating value of the firm’s preferred stock
DEBT = (short-term liabilities - short-term assets) + book value of long-term debt
TA = book value of total assets
Tobin’s q is scale independent. Hence, it’s a good measure of relative market performance
(R. H. Peters and Taylor 2017) Peters and Taylor Total Q
The neoclassical theory of investment can still be applied to intangible assets.
Propose a new Tobin’s q proxy that accounts for intangible capital, which is called total q
= the firm’s market value divided by the sum of its physical and intangible capital stocks
Firm’s intangible capital = sum of its knowledge capital and organizational capital
R&D spending = an investment in knowledge capital (using the perpetual -inventory method to a firm’s past R&D to measure the replacement cost of its knowledge capital)
Fraction of past selling, general, and administrative (SG&A) spending is organization capital, which includes human capital, brand, customer relationship,s and distribution systems.
A firm’s total capital as the sum of its physical and intangible capital (measured at replacement cost
Intangible capital is costlier than physical capital to adjust
Sample excludes utilities (SIC 4900-4999), financial firms (6000-6999), others (9000+), missing or non-positive book value of assets or sales, and firms with less than $5mil in physical capital. Winsorize all regression variables at the 1% level to remove outliers.
Proposed total q
\[ \begin{aligned} q^{tot}_{it} &= \frac{V_{it}}{K_{it}^{phy} + K_{it}^{int}} \\ &= \frac{prcc_f \times csho + dltt + dlc- act}{ppegt + K_{it}^{int}} \end{aligned} \]
where
\(V_{it}\) = firm’s market value = outshining equity (prcc_f times csho)+ book value of debt (dltt + dlc) - firm’s current assets (act)
\(K_{it}^{phy}\) = replacement cost of physical capital = ppegt
\(K_{it}^{int}\) = replacement cost of intangible capital
Previous Tobin’s q measure did not include the intangible part (Fazzari, Hubbard, and Petersen 1987) (Erickson and Whited 2011)
Intangible capital can be
Created internally
knowledge knowledge (e.g., patents, software): using perpetual inventory method \(G_{it} = (1- \delta_{RD}) G_{i, t-1} + RD_{it}\)
\(G_{it}\) = the end-of-period stock of knowledge capital (for \(G_{i0}\) can assume to be 0)
\(\delta_{RD}\) =depreciation rate (use BEA’s industry-specific R&D depreciation rates (W. C. Y. Li and Hall 2018) and 15% for missing data)
\(RD_{it}\) = real expenditures on R&D during the year (if missing treat as 0, (Lev and Radhakrishnan 2005)
brand capital (advertising under selling expense within SG&A)
human capital (employee training under general or admin expense within SG&A)
Others: Other Intangible Assets (intano) in Compustat
Purchased externally
Goodwill (not separately identifiable e.g., human capital is booked under goodwill).
Other Intangible Asset: (e..g, patent, software if separately identifiable)