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2 edition of Tobin"s marginal and average q in models with steady-state growth found in the catalog.

Tobin"s marginal and average q in models with steady-state growth

Sean Holly

Tobin"s marginal and average q in models with steady-state growth

by Sean Holly

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Published by Sheffield University, School of Management in Sheffield .
Written in English


Edition Notes

StatementSean Holly and Paul Turner.
SeriesDiscussion paper series, economics / Sheffield University, School of Management -- no.95.2, Discussion paper series, Economics (Sheffield University, School of Management) -- no.95.2.
ID Numbers
Open LibraryOL21203114M

Marginal Q may be used to capture the value of exercisable growth options. Tobin's argument is based on marginal Q, but most studies use average Q as a proxy. Average Q ratios are preferred due to their comparative ease of computation. Average Q is easily observed, since it is the ratio of the market value of existing capital to its replacement.   Free Online Library: Marginal q, Tobin's q, cash flow, and investment. by "Southern Economic Journal"; Business Economics Cash flow Comparative analysis Economic aspects Methods Economic theory Investments Management.

Tobin's Q Market value of assets divided by replacement value of assets. A Tobin's Q ratio greater than 1 indicates the firm has done well with its investment decisions. Named after James Tobin, Yale University economist. Tobin's Q Ratio A ratio of a company's market value to its total asset value. Tobin's Q ratio is based on the work of James Tobin. $\begingroup$ That's average Q. Q is the ratio of an asset's market value to the replacement cost of that asset. In some macro finance models a firm makes marginal investments until the market value of an additional investment exactly equals its replacement cost. This gives a marginal Q of 1.

2 Appendix 1 to chApter 22Baumol-Tobin and the Tobin Mean-Variance ModelsThe payment, he again divides it into $ of cash and $ of bonds, and the process continues. The net result of this process is that the average cash balance held during the month is $/2 = $—just half of what it was before. Velocity has doubled toFile Size: 2MB. Explaining Market-to-Book 2 ABSTRACT The Market-to-Book ratio, as a rough proxy for Tobin’s q, has been a common measure of firm value for over two decades. The ratio has, however, had two distinct interpretations. One emphasizes it as reflecting efficiency and growth, and the other as proxy for risk. Herein we explore these.


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Tobin"s marginal and average q in models with steady-state growth by Sean Holly Download PDF EPUB FB2

Tobin’s Marginal q & Average q: A Neoclassical Interpretation Marginal q Average q Relation between Marginal and Average q In empirical work, average q is often Tobins marginal and average q in models with steady-state growth book as an instrumental variable for marginal q, as the rst can be observed while the second cannot.

Propostion 1: Suppose the rm is a price-taker in its outputFile Size: 93KB. the "q" theory has utilized average q as a proxy for marginal q (see, e.g., von Furstenberg [8]). Section 3 of the present paper derives an exact relationship between marginal q and average q.

If the firm is a price-taker with constant returns to scale in both production and installation, then marginal q is equal to average q. Uzawa, H, "Time Preference and the Penrose Effect in a Two-Class Model of Economic Growth," Journal of Political Economy, University of Chicago Press, vol.

77(4), pagesPart II. Gould, "Adjustment Costs in the Theory of Investment of the Firm," Review of Economic Studies, Oxford University Press, vol. 35(1), pages. Tobin’s q roughly measures the average return on a firm’s capital anticipated by the market.

More relevant for investment decisions, however, is the marginal return on capital. Tobin’s q and Investment in a Model with Multiple Steady States. January ; Tobin's Marginal Q and Average Q: A Neo-Classical Interpretation growth models. It is increasingly recognized that Tobin's conjecture that investment is a function of marginal q is equivalent to the firm's optimal capital accumulation problem with adjustment costs.

This paper formalizes this idea in a very general fashion and derives the optimal rate of investment as a function of marginal q adjusted for tax parameters. Fumio Hayashi, "Tobin's Marginal q and Average a: A Neoclassical Interpretation," Discussion PapersNorthwestern University, Center for Mathematical Studies in Economics and Management Science.

Capital adjustment costs: Tobin’s q Outline 1. Neoclassical theory of investment 2. Capital adjustment costs: Tobin’s q 3. Tobin’s q and the stock-market value 4. Summary Tord Krogh ECON Septem 20 /   Q Ratio (Tobin's Q Ratio): The Tobin's Q ratio is a ratio devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the.

(i) Marginal q Versus Average q: Tobin’s theory posits that investment should be made when the change that it creates in the firm’s market value exceeds its cost.

The change in market value relative to capital cost is called ‘marginal q’ and can differ from the level of the market-value-to-cost ratio, called ‘average q’, on which.

Tobin's q (also known as q ratio and Kaldor's v) is the ratio between a physical asset's market value and its replacement was first introduced by Nicholas Kaldor in in his article "Marginal Productivity and the Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani". It was popularised a decade later, however, by James Tobin.

A comparison of marginal and average Tobin's Q ratios. Link/Page Citation projects, but a high market value is a sign that investors believe there are growth opportunities.

Marginal Q may be used to capture the value of exercisable growth options. "A Stochastic Model of Investment, Marginal Q and the Market Value of the Firm. 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 Author: Reiner Franke, Boyan Yanovski. Marginal q, Tobin's q, Cash Flow, and Investment Klaus Gugler,* Dennis C.

Mueller,t and B. Burcin Yurtoglul Many studies of the determinants of investment use Tobin's q to control for the investment opportunities of a firm. Tobin's q roughly measures the average return on a firm's capital anticipated by the market.

Differences in average q s may be dominated by differences in inframarginal returns on capital, and thus may be poor predictors of investment. An important contribution of this paper is to replace Tobin s average q as a control for the investment opportunities of firms with the theoretically appropriate marginal q.

9 Throughout. Given our assumption that the markup is one in the first steady state, our model would generate a Tobin’s Q equal to the ratio of one minus dividend taxes over one minus capital gains taxes. However, if we take average tax rates in the periodthis ratio is, while average Tobin’s Q is Back.

James Tobin () presented a simple model of monetary growth which follows the Solowian model (which Tobin had independently developed in a model) in all respects plus one: the existence of government debt (net "outside" wealth).

For our purposes, let us assume there is only one such type of outside wealth: money. Let money yield a certain rate of return. We study the impact of stochastic interest rates and capital illiquidity on investment and firm value by incorporating a widely used arbitrage-free term structure model of interest rates into a standard q theoretic framework.

Our generalized q model informs us to use corporate credit-risk information to predict investments when empirical measurement issues of Tobin’s average q Cited by: 5. Investment, Tobin's q, and Interest Rates Xioaji Lin, Chong Wang, Neng Wang, Jinqiang Yang. NBER Working Paper No.

Issued in AugustRevised in November NBER Program(s):Asset Pricing, Economic Fluctuations and Growth We study the impact of stochastic interest rates and capital illiquidity on investment and firm value by incorporating a widely used.

In Abel and Eberly (), it is actually the average q, not the marginal q that is relevant for investment. [25] This type of interpretation is more in line with the model in Abel and Eberly (), where investment is related to average q because average q provides information on. We decompose the market-to-book ratio into two additive components: a conservatism correction factor and a future-to-book ratio.

The conservatism correction factor exceeds the benchmark value of one whenever the accounting for past transactions has been subject to an (unconditional) conservatism bias. The observed history of a firm’s past Cited by: 2.

Tobin’s q (symbolized by q t), is de ned as the value in period t of a marginal increase in the capital stock in period t+ 1. Explain how q t is related to the value function.

3. Show that the rst order conditions can be transformed to two di erence equations in q tand K t: K t+1 = K t+ q t 1 ˜ K t (3) q t+1 = (1 + r)q t F 0 K (K t+ K t(q.The baseline model has three features which give rise to a negative relation between q and inflation: (i) a Lucas and Prescott () physical capital adjustment cost with a rising marginal cost of investment, 7 such that along the balanced growth path (BGP) q is a function of the output growth rate (Proposition 3), (ii) human capital Cited by: