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Tobin's q ‐Ratio and Market Reaction to Capital Investment Announcements
Author(s) -
Blose Laurence E.,
Shieh Joseph C. P.
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00434.x
Subject(s) - tobin's q , economics , investment (military) , monetary economics , capital (architecture) , stock (firearms) , stock market , financial economics , econometrics , mechanical engineering , paleontology , archaeology , horse , politics , biology , political science , law , history , engineering
There is a significant positive relation between Tobin's q‐ratio and the magnitude of stock market reaction to capital investment announcements. The findings have the following implications for capital investment theory: (i) The results provide evidence substantiating the link between the q‐ratio and real investment for industrial firms. For public utilities however, no such link exists, (ii) The study finds that average q and marginal q are correlated but the relation is somewhat more complicated than simple equality as assumed by numerous empirical studies. (iii) The findings suggest that investors can use average Tobin's q ‐ratio to identify companies with profitable real capital investment opportunities.