Tobin's 'q' theory

Tobins q theory,

Definition of Tobins q theory:

  1. Economics theory of investment behavior where q represents the ratio of the market value of a firms existing shares (share capital) to the replacement cost of the firms physical assets (thus, replacement cost of the share capital). It states that if q (representing equilibrium) is greater than one (q > 1), additional investment in the firm would make sense because the profits generated would exceed the cost of firms assets. If q is less than one (q < 1), the firm would be better off selling its assets instead of trying to put them to use. The ideal state is where q is approximately equal to one denoting that the firm is in equilibrium. Also called general equilibrium theory or q theory, it was proposed by the US Nobel laureate economist James Tobin (1918-).

Meaning of Tobins q theory & Tobins q theory Definition