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On the Accuracy of Different Measures of Q

Author

Listed:
  • Timothy Erickson
  • Toni M. Whited
Abstract
Tobin’s q is widely accepted as proxy for an underlying “true” q, which is assumed to characterize a firm’s incentive to invest. Researchers have developed numerous methods for computing q. This article assesses the measurement quality of different proxies for q. We adapt the measurement-error consistent estimators in Erickson and Whited (2002) to estimate the extent to which variation in true unobservable q explains variation in different proxies for q. We find most proxies for q are poor: careful algorithms for calculating q do little to improve measurement quality. Using elaborate algorithms, however, depletes the number of usable observations and possibly introduces sample selection bias.

Suggested Citation

  • Timothy Erickson & Toni M. Whited, 2006. "On the Accuracy of Different Measures of Q," Financial Management, Financial Management Association, vol. 35(3), Autumn.
    • Handle: RePEc:fma:fmanag:ericksonwhited06
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