What is Tobin's Q theory?
Theory Q is the theory of investment behavior developed by American economist James Tobin. The formula is commonly referred to as Tobin's theory of Q and aims to combine the market value of shares issued by companies to the substitute costs associated with the assets of the company. In an ideal situation, the market value and replacement costs would be more or less the same and create a state of balance.
In Tobin Q theory, the market value of existing shares issued by companies is divided into alternative costs for the registered capital, with "Q" representing the resulting value. According to this theory of the economy, "Q" should be at least 1. If the value is more than one, it is an indicator that additional investments are recommended because generated profits are higher than the cost of using the company's assets.
At the same time, Tobin's Q of the theory also states that any Q value less than one suggests that the assets used by the companies are not compensated. In the case of this, the company may want to consider the sale of some assets becauseThey do not use the best advantage. The idea is that by selling assets that are not directly related to the generation of profit, it will help society closer to the state of balance.
When the Q is found to be one, it is considered to be a present balance. This means that according to Tobin's theory Q, the balance between the cost of using assets and the generated profit is balanced. If this is the case, the company may not consider any changes. The desired balance has been achieved and society will ultimately benefit from maintaining the current state.
Tobin's theory Q is generally accepted as a reliable means of evaluating the market level of society. However, some economists believe that Q theories are best used in conjunction with other economic theories in terms of assessing future events by society. From this perspective, Tobin's theory of Q theory is seen as one of several valid indicatorThe ones that can help owners and management plan a future event without not running out a specific event.