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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 28, No. 1, pp.1-29
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2015
Received 22 Jul 2014 Revised 26 Oct 2014 Accepted 03 Nov 2014

Estimating Tobin’s Q for Listed Firms in Korea (1980-2005): Comparing Alternative Approaches and an Experiment with Investment Functions

Ji Youn Kim ; Jooyoung Kwak ; Keun Lee
Research Fellow, IBK Economic Research Institute, Seoul, Korea, Tel: 82-2-729-6891, Fax: 82-2-729-6605 jiyoun1@ibk.co.kr
Associate Professor, School of Business, Yonsei University, Seoul, Korea, Tel: 82-2-2123-6259, Fax: 82-2-2123-8639 jooyoung.kwak@yonsei.ac.kr
Professor, Department of Economics, Seoul National University, Seoul, Korea, Tel: 82-2-880-6367, Fax: 82-2-886-4231 kenneth@snu.ac.kr

JEL Classification: E22, L25, G34

Abstract

Tobin’s Q is the most common measurement of firm value and performance. However, estimating Tobin’s Q accurately is not easy. Researchers have used book values of debts or assets rather than the market values. We estimate Tobin’s Q for listed firms in Korea from 1980 to 2005 based on replacement costs of assets as well as market values of debts and common and preferred stocks. We compare the estimates using the modified annual average depreciation rates and economic depreciation rates. In sum, we present and compare four alternative series of Tobin’s Q measures. We then estimate investment functions with alternative Tobin’s Q values as regressors to compare the reliability of alternative estimates. We find that the simple measure of using book values of both debts and assets is the most unreliable.

Keywords:

Tobin’s Q, Firm value, Replacement costs, Investment function, Korean firms, Business groups

Acknowledgments

Earlier versions of this paper were presented at the 2008 annual conference of the Korea Securities Association in 2008 and at the World Class University Workshop at Seoul National University in March, 2010. The third author acknowledges the support provided by The Institute of Economic Research of Seoul National University.

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