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On the long-run equilibrium value of Tobin’s average Q

Author

Listed:
  • Reiner Franke

    (University of Kiel, Germany)

  • Boyan Yanovski

    (University of Kiel, Germany)

Abstract

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 costs and profits of the firms. The familiar benchmark value Q° = 1 obtains if another condition on the risk premium holds true, which may or may not be the case. An elementary numerical check demonstrates that possible deviations of Q° from unity are not overly dramatic.

Suggested Citation

  • Reiner Franke & Boyan Yanovski, 2016. "On the long-run equilibrium value of Tobin’s average Q," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 13(1), pages 103-113, April.
    • Handle: RePEc:elg:ejeepi:v:13:y:2016:i:1:p103-113
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    More about this item

    Keywords

    Tobin’s average Q; debt and equity financing; no-arbitrage condition; fundamentalist trader;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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