Tobin’s Q theory is a simple method that allows one to assess the prospects for investments. However, recently this approach has been supplanted by more complex fundamental parameters. In addition, there are no cases of application of Tobin’s Q in the UK market in the literature. Therefore, this study aims to fill this gap by comparing Q theory with other indicators on the example of the UK stock market. This goal is supposed to be achieved by using existing frameworks and their application to the situation under consideration.
Successful investment requires a detailed analysis of whether the stock is overvalued or undervalued. Tobin’s Q theory of investment helps determine this, representing a simple capitalization ratio to replacement value (Hayes, 2021). However, at the moment, this approach is practically not used, supplanted by fundamental indicators (Majaski, 2021). At the same time, there is very little information regarding a direct comparison of Tobin’s theory with the parameters common today. In addition, the application of Q Theory is practically limited to only one United States, information for which is publicly available in the form of visual graphs (Tobin’s q, 2021). Consequently, the purpose of this research is a comparative assessment of the effectiveness of investment predictions of Tobin’s Q theory of investment and fundamental macroeconomic parameters using the example of the UK stock market.
Analyzing the market and stocks for making investment decisions is a complex procedure associated with analyzing various ratios. At the moment, the most common are the price-to-earnings (P / E) ratio, price / earnings-to-growth (PEG), and other indicators related to the so-called fundamental parameters (Kennon, 2021). However, such lists rarely feature Tobin’s Q theory of investment. A targeted search for information related to this technique leads only to indicators for the US stock market and papers examining the effectiveness of Tobin’s Q. Such studies are extremely few, outdated, and highly specialized. Pietrovito’s (2016) article examines Tobin’s Q versus P/E ratios, but only for Germany. Older sources consider different methods of Q analysis but do not compare them with other coefficients (Erickson and Whited, 2006). Thus, there is a gap in the current literature when comparing Tobin’s Q with other theories and applying this parameter in the UK context. It is possible to answer the posed research question using the existing methodology regarding comparing coefficients and the principles of calculating Q theory.
Reference List
Erickson, T. and Whited, T.M. (2006) ‘On the accuracy of different measures of q’, Financial Management, 35(3), pp.5-33.
Hayes, A. (2021). Q ratio: Tobin’s Q.
Kennon, J. (2021). How to tell when a stock is overvalued.
Majaski, C. (2021). Fundamentals.
Pietrovito, F. (2016) ‘Do price-earnings ratios explain investment decisions better than Tobin’s q? Evidence from German firm-level data’, Applied Economics, 48(34), pp.3264-3276.
Tobin’s q (2021).