Tobin's q and Industrial Organization by Lindenberg and Ross (1981)

1. Tobin's q Ratio and Industrial Organization
Author(s): Eric B. Lindenberg and Stephen A. Ross
Reviewed work(s):
Source: The Journal of Business, Vol. 54, No. 1 (Jan., 1981), pp. 1-32
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/2352631 .
Accessed: 21/02/2012 17:16
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.
The University of Chicago Press is collaborating with JSTOR to digitize, preserve and extend access to The
Journal of Business.
http://www.jstor.org

2. Eric B. Lindenberg
American Telephone and Telegraph Company
Stephen A. Ross
Yale University
Tobin's q Ratio and Industrial
Organization*
I. Introduction
The use of modern financial economics and of
financial data to explore issues in industrial organization is just beginning. Financial price data
provide a viewing window into the firm through
the market's valuation of the securities issued by
the firm and the changes in these values over
time. Accounting data, on the other hand,
provide information on the resources used by
the firms. Thus, comparing accounting data and
financial valuation data offers the opportunity to
examine performance, the difference between
inputs, on one hand, and output, on the other.
This paper develops such a comparison between accounting data and financial data to examine the extent, distribution, and history of
monopoly rents and quasi-rents in the industrial
sector.' The basic idea of our approach is to use
the difference between the market value of the
firm and its replacement cost as a measure of
or bound for monopoly rents. The analysis is
based on the pioneering insights of Tobin, who
introduced the variable q, the ratio of market
value to replacement cost, into macroanalysis
(see Tobin and Brainard 1968, 1977; and Tobin
*We wish to thank an anonymousreferee for his helpful
comments.
1. Other papers discussing this subject from somewhat
different approachesinclude Thomadakis(1976, 1977) and
Sullivan(1977a, 1977b).
(Journal qf Business, 1981, vol. 54, no. 1)
? 1981by The University of Chicago
002 1-9398/81/5401-0004$01.50
1
This paperexaminesthe
relationshipbetween
accountingdata and
financialmarketdata to
determinethe extent,
distribution,and history
of monopoly and quasirents in the industrial
sector. Our basic idea
is to use Tobin's q
ratio-the ratio of the
marketvalue of a firmto
the replacementcost of
its assets-as a measure
of, or bound for, the
monopoly rents of that
firm.We develop a data
base of q ratios for a
sample of firms and relate q both theoretically
and empiricallyto other
traditionalmeasures of
monopoly power.

3. 2
Journal of Business
1969, 1978). Tobin's intent was to examine a causal relationship between q and investment. He argued that if, at the margin, q exceeded
unity, firms would have an incentive to invest, since the value of their
new capital investment would exceed its cost. It is clear that if all such
investment opportunities were exploited, the marginal value of q
should tend toward unity.
We will employ this argument peripherally below, but our focus is
somewhat different. Our interest is in the cross-sectional value of q and
its implications for industrial organization in general, and the measurement of monopoly power in particular. The essence of the argument is that for a competitive firm, one would expect q to be close to
one, and as we examine firms with increasing monopoly power (increasing ability to earn above a competitive return), q should increase.
If a firm's q is greater than one, the market value of the firm is in excess
of its replacement cost. If there is free entry, other firms could enter the
industry by purchasing the same capital stock as the existing firm.
Furthermore, they would anticipate an increase in value over their
investment because its market value would exceed its cost. Thus, in
the absence of barriers to entry and exit, q will be driven down to one
as new firms enter (or existing firms expand if average and marginal q
coincide). Similarly, a firm which is regulated so as to earn no
monopoly rents would also have a q close to one.2 A monopolist,
however, who can successfully bar entry and is not adequately regulated will earn monopoly rents in excess of the ordinary returns on the
employed capital. The market will capitalize these rents, and the market value of the firm will exceed the replacement cost of its capital
stock, that is, q will persist above one.
But the actual q value of even a competitive firm may differ from
unity. There are two principal reasons for this. First, the firm may
possess factors of production on which it earns ordinary Ricardian
rents, and these may not be captured in its replacement cost figures. To
the extent that the firm possesses factors which lower its cost function
relative to that of the marginal firm, it will be inframarginal to the
industry and will have q in excess of one. Of course, such factors
should be capitalized in replacement cost as well as in market value,
but this omission, which tends to bias q upward, is avoidable only to
the extent that the market value of these factors is carried on the
books. For some firms, though, this effect will be mitigated by an
opposite tendency. If the firm is not investing in its existing capital
stock, for example, if the firm is "dying," perhaps part of a dying
industry, or if there have been particular types of technical progress
which make its capital stock obsolescent, its q can fall short of unity
2. Leland(1974)has also discussed the relationship
betweenreplacement
cost andfair
rate of returnwithin a regulatoryframework.Of course, if the factors which constitute
entry barriersare completely capitalized,replacementcost would rise to marketvalue
and q would be unity.

4. Tobin's q Ratio and Industrial Organization
3
even if it is earning monopoly or Ricardian rents. To put it simply, a
firm whose capital stock is simply not worth replacing can have q < 1.3
In general, though, for firms engaged in positive investment, in
equilibrium we expect q to exceed one by the capitalized value of the
Ricardian and monopoly rents which the firm enjoys. Since the former
cannot be negative, the q value of the firm will provide an upper bound
to its monopoly rents. This paper will develop the arguments outlined
above and compare this new measure of monopoly power with more
traditional approaches to the problem. Section II develops the theory
in an analytic framework which makes specific the relationship between q and monopoly rents. In Section III, we develop a procedure
for constructing a data base of q for a large sample of firms. We also
discuss the issues which arise in implementing the theory and, in
particular, the sources of the differences between measured q values
and equilibrium values. In Section IV, we use this data base to examine
empirically several alternative q-based measures, or bounds on
monopoly power for the firms in the sample. In Section V, we test the
theory by comparing these measures with two traditional approaches
to the measurement of monopoly power: the Lerner index and the
four-firm concentration ratio. The final section briefly concludes the
paper and suggests some further applications of the q measures in
industrial organization and policy problems.
II.
A Theory of q and Monopoly Profits
In this section we develop a theory of q which links this variable to the
firm's stream of revenues and costs. We begin by specifying the net
revenues of the firm, since this is the stream which a competitive
securities market will capitalize to obtain the firm's market value, M.
If p denotes the price (vector) of the firm's output and Q denotes its
output (vector), total revenue is given by pQ. If we let L denote the
use of variable factors of production (e.g., labor) and w is the current
rental cost of these factors, the firm's net revenue is given by
R = pQ -wL.
(1)
It is this net revenue stream which the securities market values, presumably on the assumption that firms are attempting to maximize this
value subject to the constraints under which they operate. Such constraints are of a technological, an economic, and a regulatory nature.
The resulting value assigned by the market is the valuation of the fixed
factors embedded in the firm, and these include invested capital (and
land) and all of the intangible factors on which the firm earns rents. The
3. The reverse is also possible, and a firm which is growing so rapidly that it is
outpacingits capital goods supply sources, i.e., its factor marketsare not clearingat
existingcapitalgoods pricesanda demandqueueis forming,may haveq > 1 even though
it is earningno excess rents.

5. Journal of Business
4
firm's assets fall into three broad categories. First, there are those
which are sold in the market and which make up what is traditionally
thought of as the capital stock of the firm. In this category would fall
plant and equipment, inventory, and so forth. The second category is
composed of those special factors which the firm possesses which
lower its costs relative to those of competitive or marginally competitive firms. These factors would presumably be valued for their costreducing abilities. For example, a firm might have special access to a
river whose waters are so cold that it can provide industrial coolant
more efficiently than that of its competition. The third category of
capital is subtler still, and it is made up of those special factors of
production which the firm possesses which act as barriers to the entry
of competitors. Without being unduly specific about what forms these
could take, for example, patents or scale economies, we will identify
the net revenues attributable to them as monopoly rents.
In sum, then, the total market value can be represented as
M = MK + MA + MN,
(2)
where MK, MA, and MN are the capitalized values of the rents attributable to invested capital or replacement capital K, firm-specific factors
A, and, finally, monopoly profits N, respectively. To examine this
breakdown in detail, we will have to look closely at the investment
behavior of the firm, since this is the prime endogenous determinant of
the intertemporal behavior of net revenue R.
A firm making additions to its capital stock at time t will do so up to
the point at which the marginal value of a further addition is equal to its
unit cost ct. For simplicity, we assume that capital depreciates at a true
economic exponential rate 8. Technical progress is assumed to be
capital augmenting and to occur at a rate 0, and we measure capital in
efficiency units, that is, Kt will denote the amount of time 0 capital
stock units to which the total capital stock at time t is productively
equivalent. With these assumptions, the marginal value of an investment increment at time t is given by its present discounted marginal
contribution to the net revenue stream4
0
PVt
t
e'RK(KT, T)e(8+r)(T
t)dr,
(3)
where r is the firm's discount rate and RK(KT,z) is the marginal net
revenue contribution at time i from an increment to investment. The
first-order condition which characterizes the optimum level of investment is simply
4. Whilewe are not explicitlytreatingtaxes as an expense in this argument,they can
without too much difficulty.Equations(3) and (5) will be modifiedto
be incorporated
account for the firm's marginaltax bracket, its rate of investmenttax credit, and its
depreciationrate for tax purposes. The theory that follows can also be modified to
include tax effects, but the essential message remainsthe same.

6. 5
Organization
Tobin'sq Ratioand Industrial
(4)
ct=PVt,
for all t at which investment is positive.
Differentiating (4) with respect to time, we obtain the marginal pricing relationship5
et = (0 + r + 8)ct - e'tRK(Kt,t).
(5)
Notice that this relation is satisfied by firms which are engaged in
positive investment, but not, in general, by firms which are not expanding their productive capacity. For such firms
00
Ct > PVt = eotf RK(KT,7)e - (8+r)(T-t)d7.
t
We will refer to capital goods and firms for which (5) holds with
inequality as "dying," and they will be treated separately.
Ignoring tax effects, we can use the marginal pricing relation to
determine the share of total market value attributable to currently
installed capital. In fact, with investment anticipated in the future, the
current value of the share of return imputed to capital, net of future
investment, is simply the current replacement cost of capital. To see
this, we evaluate the return imputed to capital, KRK, minus the cost of
new investment, cI, making use of the capital growth equation
K
= eOt
(6)
-8K.
From (5), the imputed current value of the existing capital stock and of
future investment prospects is given by6
cI)e-r(T-t)dr
(KRK-
-
f {r(o 8 + r)c
+
f {[(O 8 + r)c +
[r
rce
=
- c]KeOT - cI}e r(T)dr
r
f
-r
OT -
= cKe -
I
OT)e
cK
-
)e
-j(cKe
cKeOTe_r(T-t)dT
rf (cKe
c]K -
-
(cK)e-oTe-r(T-t)
8cK}e-OTer(T-t)dr
(7)
dr
|
r(T-t)dr
JOt
.
5. The dot over a variableindicates a derivativetaken with respect to time.
net
6. To ease the notation,we will referto marginal revenueas simplyRK,recognizing that it depends on time and on the level of capital employedat that time.

7. Journal of Business
6
Since Ke-0t is the number of new units of capital which would be
required to replace the existing capital in the firm at time t, this is
simply the current replacement cost RCt, where we will define replacement cost as the cost of the most efficient technology which can
produce the output flow. (See the Appendix for a further discussion of
the influence of technical progress on replacement cost.)
The market value of the firm, which is the present worth of all
receipts less expenditures, can now be decomposed as
Mt=
=f
(R -
cI)e-r(T-t)d
cI)e-r(T-t)dr +
(KRK-
= RCt +
(R
-
f
(R - KRK)e-r(T-t)dT
(8)
KRK)e-r(T-t)dr.
From our earlier decomposition, then, MK, the portion of value attributable to the existing capital stock is simply the replacement cost
RCt, and the remaining value
00
f
(R -KRK)e - r(T-t)dr = MA + MN,
t
is the sum of the values of ordinary and monopoly rents. Notice that,
for a growing firm, market value will never fall below true replacement
cost since ordinary and monopoly rents cannot be negative, although
they can be zero. Notice, too, that this result does not assume competition in the market for new capital goods. Given the prices of such
goods, the result hinges only on the existence of a competitive securities market. (While free entry also supports this result, it is not required.)
Of course, for a firm which is not currently investing or will cease
investing in the future, we have c > PV, and we can actually have Mt >
RCt. Such a firm may well be earning rents but not to a degree sufficient
to offset the differential between the present value of the capital stock
K * PVt, and RCt.
We can now turn to the evaluation of that portion of market value
which is net of capital payments, that is, MA + MN. At the margin,
capital is chosen so that the reduction in short-run operating costs is
equal to the rental rate. Since R denotes revenue net of variable costs,
it follows that R - KRKis simply revenue minus long-run costs. Letting
AC stand for long-run average costs, from our previous analysis we
have
RCt + f(R
Mt=
-KRK)e-r(T-t)dr
(9)
=
RCt
+
f(P
-AC)
Qe-r(T-t)dr.

8. 7
Tobin's q Ratio and Industrial Organization
MC
D/
AC
/
P
+
FOR
IMPUTEDCOSTS
ENTRYBARRIERS
AC (ACTUAL)
PRICE
MR
QUANTITY
FIG. 1.-Components of a firm's rent
This confirms our intuition that the difference between M and RC is the
capitalized difference between revenues and long-run costs. Of course,
to the extent that costs are imputed but not actually expensed to owned
factors, AC will understate true opportunity costs. The difference
measures the true monopoly profits attributable to barriers to entry and
the remainder is ordinarily rent.
Figure 1 illustrates this breakdown for a firm with upward-sloping
costs. In a long-run stationary equilibrium, as M approaches RC, P
approaches AC. To put the matter differently,
qt-1l+
RC
f
(P - AC)Qer(Tt)dr,
(10)
and q - 1 is the capitalized value of both the monopoly and Ricardian
rents scaled by replacement cost. In this sense it is an upper bound to
the value of monopoly rents earned by the firm. Notice, too, that since
P : AC in equilibrium, we must have q ? 1.
Proceeding with the analysis, from (10) we have
qt=
+ qt -
(P -
- cI)e-r(T-t)dT
f(R
1 qt
which implies that
(P
AC)Qe-r(T-)dT
-
AC)Qe-r(r-t)di][f
PQe-r(T-t)dT

9. Journal of Business
8
qt
?
[fPQe
f
-r(T-t)dl
(AC)Qe r(T-t)d-]
-P7
AC
We can summarizethis result in the following proposition, which
makes use of Lerner's index of monopoly power, the percentage difference between price and marginalcost (see Scherer[1971],p. 50, for
a discussion of the use of Lerner's index in measuring monopoly
power).
Proposition
Let S denote the ratio of averageto marginalcost, that is, the elasticity
of the cost function. A firmhas decreasingcosts if S > 1 and increasing
costs if S < 1. A firm engaged in positive (gross) investment has a
Lerner's index,
L=- (P -MC)
IP
I-
ISq,
(1
where q is "Tobin's q." Equivalentstatementsof this result are (P AC)/AC S q - 1 and q - (1/S) [1/(1 - L)], and with constant returns
to scale (S = 1), we have the simple result that L - 1 - (I lq) and q ?
I/(1 - L).
The intuitionbehindthe effect of scale, that is, the ratio of averageto
marginal cost, on these bounds is straightforward.In the constant
returnsto scale case, average and marginalcosts coincide. As we have
already seen, q capitalizes the difference between price and average
cost, which, in the case of constant returns, equals the difference
between price and marginalcost. With scale economies, average cost
is declining and marginalcost lies below average cost. As a consecost ratio
quence, q will only be an upperbound on the price/marginal
if it is augmentedby S, the ratio of averageto marginalcost. Similarly,
with increasingcosts (decreasingreturns),the bound can be tightened
because marginalcost is greaterthan average cost. Consequently, we
might expect that the Lerner index inadequatelymeasures monopoly
power because of its omission of the influence of scale on the competitive returnlevel.
Over time, the rents attributableto factors not included in replacement costs, that is, A, will fluctuate,grow, or decay dependingon how
A depreciates, on technical progress, and on how capital and variable
factors substitutefor A. But for a monopolistthere will be a persistent
wedge driven between price and average cost and this, in turn, will
7. This last result follows rigorouslyfrom the twin assumptionsof homotheticityin
productionand constant elasticity of demand. Notice that these variablesare current,
i.e., time t values.

10. Tobin's q Ratio and Industrial Organization
9
drive a wedge between q and unity. Correctingfor scale effects, a
similar gap persists between price and marginalcost.
Notice, though, thatfor a perfect competitorwe may still have q > 1,
with the excess being the valuation of the ordinaryrents earned on
specific factors. A similarresult can hold for a regulatedfirminsofaras
Ricardianrents in excess of those included in replacement cost are
earned on specific factors. (This is equivalent to an underestimateof
replacement cost.) The value of q only provides an upper bound to
monopoly power; a firm may have a true index below the bound. Of
course, for a firm which is not currentlyinvesting or which foresees
significantperiods of no gross additionsto its capital stock, this proposition need not hold. For such a firm, as we have alreadyseen, market
value can be less than replacementcost, that is, q < 1. Furthermore,
this can hold whether the firm is earning monopoly rents or specific
ordinaryrents.8
Finally, we should note that the analysis could be further complicated by explicitly introducinguncertainty and using a competitive
valuationoperator(see Ross 1978)to relate the profitstreamto market
value, but it can be shown that the basic proposition is reasonably
robust to these considerationsas well.9
The rest of the paperis devoted to using the theory of q developed in
the analysis above to measure the aggregateRicardianand monopoly
rents of a collection of publicly traded firms. The next section will
describe the transitionfrom the theory to the data.
8. A modification
must also be madefor the firmwith a stock of nonproductive
assets,
e.g., an excess cash or securitiesposition. Such a stock would addequallyto bothM and
RC and tend to bias q towardunity. The extent to which firmshold such nonproductive
the
assets, though,is somewhatproblematic; line betweenproductiveandnonproductive
assets is arbitrary.As a consequence, the effect will be minor, and we will ignore it.
9. To verify this in the simplestfashionassume that randomnet revenuesare distribwith E(5t)
uted independently
over time as Hlt= H1jt,where 5t is identicallydistributed
= 1. From the mean-variance
pricingtheory,
capital-assetpricingmodel or the arbitrage
with no intertemporalchanges in the market price of risk, X, we have the pricing
relationship
Mt =E(Mt+j
E(Iatjl
+ fItj+) - X cov (Mt+, + I-t+,, market returns)
1 +r
+
1 I+r
=
_
t
1+r
(1 - XWl) t
+
8HtI
1 +r
(+,
I
1 T+1I
( A
Tt+T (1+ r)
where,8 is the covariancebetween5tand the marketreturn.In continuoustimewe would
have Mt = ft7(1 - Xf3)HIt+.
e r('s-t)ds,which simply scales all of our previousresults by
as
(1 - X,B) indicated in the text. This constant scaling leaves the basic proposition
unchanged.

11. 10
Journal of Business
Table 1
Data Sources
Variables
TA, HINV, HNP, DEP, I, inventory valuation method, year-end common stock
price, shares outstanding, D1, DL
GNP deflator-gross private nonresidential
fixed investment, wholesale and retail
prices indices
Preferred stock yield index, bond ratings
and yields
RNP, RINV
Source
Expanded Industrial and
Utility Tapes (Standard and Poor's
COMPUSTAT Services, Inc.)
National income and product accounts,
U.S. Department of Commerce
COMPUSTAT
Standard & Poor's, Moody's industrial
and utility manuals
SEC 10-K reports (computerized file
supplied by Standard & Poor's
COMPUSTAT Services, Inc.)
= total assets as reported,HINV = inventoriesat historicalbook value, HNP = net
NOTE.-TA
plantat historical
book value,DEP = currentbook depreciation
expense,I = gross investment
(book)
in plantand equipment, 1 = total debt maturing 1 year,DL = long termdebts maturing
D
in
beyond 1
cost.
year, RNP = net plant at replacementcost, and RINV = inventoriesat replacement
III.
Proceduresfor Calculatingq Ratios
To implement the theory, we will construct a data base of q's for
individualfirms. The actual data base descriptions and their sources
are given in table 1. In this section we will consider the methods by
which q is calculated and why the q measured from this data differs
from the actual q of the theory.
The calculationof q requires separate calculationsfor marketvalue
and replacement cost.
Market Value
The financialpaper representingownership claims on the firms in our
sample are, for the most part, well traded (or have well-tradedsubstitutes), and, in principle,by suitable adjustments,time series of market
values can be computed. Insofar as securities markets are as close to
perfectly competitive marketsas we can find, the sum of the values of
these claims shouldprovide an accuratemeasureof the marketvalue of
the firm.
The firm's securities fall into three broad groups:'0 (a) common
stock, (b) preferredstock, and (c) debt. Throughout,we will assume
that recorded year-end common stock market values represent true
market values, and these, in turn, fully reflect the informationused
in valuing the returns of the firm by equity holders. Because of the
difficultyof obtainingcomplete price quotes for preferredstocks, we
calculatea firm'saggregatepreferredstock marketvalue by dividingits
stock is
10. We are implicitlyassuminghomogeneitywithingroups.Thusall preferred
of
straightpreferredand all debt is straightdebt. Considerations convertiblesecurities,
call provisions, etc., are omitted. Whileeach of these subcategoriescould be pricedout
and
and dealt with separately,the data requirements availabilitymake the task beyond
the scope of this paper.

12. Tobin's q Ratio and Industrial Organization
11
total preferreddividends by Standard& Poor's preferredstock yield
index. (This procedure follows that used by Tobin and Brainard
[1977].)
This market value of debt is even more difficult to obtain from
recorded price data. Much bond trading is done off the floor of the
exchanges, so that published exchange data need not fully reflect investors' valuations. One possible way to handlethis is to price out the
individualissues using yields associated with the bond ratings of the
firm. While this is ideal, the enormity of the task is complicated by
the lack of computertapes with the necessary data. As a compromise
we have used the following procedure. In any year t, total recorded
book debt, Dt, can be broken down as"
Dt
Dlt +DLt,
(12)
where D lt is the debt that will mature before year t + 1 (including
short-termdebt) and DLt is the long-termdebt maturingbeyond t + 1.
We assume that the market value of the debt maturingby time t + 1
equals its book value, Dlt. Long-term debt, however, will have a
of
marketvalue that depends, significantly,on the maturitydistribution
the firm'sbonds, their coupon rates, and the currentyield to maturity.
As a first step we estimate the maturitydistributionof each firm'sdebt
using the following assumptions:(1) All new debt is issued for n years.
(2) In any year, t, the firm moves long-term debt issued in year t - n +
1 into its short-termaccount. It then may retire additionaldebt or add
new long term debt. (3) In any year, t, the total long-term debt is
the sum of all new debt (N3) issued in the yearsj = t - n + 2, t - n +
1, . . , t - 1, t. (4) Before some initial year, to0 Nj - (1/n) Dto,i = to n + 2, . .. , to. (5) No new debt is issued unless total long-term debt
is increased. Under these assumptions it follows that all t > to,
.
Nt = DLt
-
DLt-, + Nt-n+l if DLt > DLt-1,
(13)
and Nt = 0 if DLt - DLt-,. Thus the firm first retires (moves into the
short-termaccount) its oldest debt first, then either issues some new
debt if net long-termdebt is to be increasedor retires more if desired.
It should be recognized that formula(13) may not satisfy exactly the
equation Dt j= o Nt-j for all t.'2 Instead of using the values of Nj
directly, we obtain the maturity distributionby first estimating the
fraction of reportedlong-termdebt, ft,t-j. that was issued new at time
t - j as
n-2
ttt-i
= Nt-j
Nt-,
=
0,
.
.
,
n
-
2.
(14)
k=O
11. Ideally we would like to break the debt down into year-by-yearmaturities,but
such data are unavailablein computerizedform.
12. A check was madefor a sampleof 10firmseach of the years 1965, 1970,and 1975.
The sum of the estimated new issues deviated from DLt by an average 1%o.

13. 12
Journal of Business
Having established the maturity distributionof the firm's long-term
debt, we next proceed to calculate its market value. We employ the
followingassumptions:(6) The yield to maturityof a firm'sdebt at time
t, when the firm'sbond ratingis Z, is denoted as pz. (7) All new debt at
time t, of a firmwith bond ratingZ, is issued at par with a coupon rate
equal to pz. (8) The marketvalue, at time t, of a bond is calculatedusing
its coupon rate and the currentyield to maturityassociated with that
firm's bond rating. With these additionalassumptions, it follows that
the marketvalue of a firm's debt (MVDt) can be calculated from D It
and DLt by the following formula
MVDt = D1t
n-2
+ DLt
Z ft,t-3{(pz
jlpI)[I
- (1 + pz)-(n-i)]
+ (1
+ p)-(n-i)}.
(15)
i=0
Summarizing proceduresdescribed above, the firm's total market
the
value is given by
Mt = MVDt + MVt(common stock) + MVt(preferred stock). (16)
Replacement Costs
The measurementof replacement cost is a more difficult matter because of the lack, in most cases, of active markets for old capital
goods.'3
By definition, replacementcost is the dollar outlay needed to purchase the currentproductivecapacity of the firmat minimumcost and
with the most modern technologies available (see Appendix). This
concept is more complex and more difficultto measure than is reproductioncost, which measuresonly the inflation-adjusted of plantif
cost
reproducedin kind. To determinereplacementcost we must also adjust
for varyinglevels of technologicaladvance across plant categories and
producttypes, and for varyingrates of "real" (versus book) depreciation. Nevertheless, the Securities and Exchange Commissionin 1976
began requiringlarge companies to disclose replacement-costdata on
their SEC 10-Kfilings(Securitiesand Exchange Commission1976).In
particular,replacement-costestimates were requiredin the categories
of plant and equipment(gross and net), inventories, depreciationexpense, and cost of goods sold. Unfortunately, for our purposes, the
SEC gave broad leeway to firms in the methodology used for the
calculations.We use this source to calculate overall replacementcosts
13. For the effect of inflationaccountingon individualfirms, see Davidsonand Weil
(1975, 1976)and Falkensteinand Well (1976, 1977).For some work constructingaggregate estimates, see Ciccolo (1975),Tobin and Brainard(1977),von Furstenberg
(1977),
and Presidentof the United States (1978, 1979).

14. Tobin's q Ratio and Industrial Organization
13
for the years 1976 and 1977.14 In addition, we construct a series of
individual firm replacement costs prior to 1976 using the 1976-77
numbers along with past balance sheet information taken from the
COMPUSTAT Expanded Industrial and Utility Tapes supplied by Stan-
dard and Poor's COMPUSTAT Services, Inc.
The assets of a firm fall into three broad categories: (a) plant and
equipment, (b) inventories, and (c) other assets. Category c contains
liquid assets such as cash and securities as well as land. Some of these
assets are traditionally carried on the books at market value while
others are carried at original cost. For our purposes we will assume
that the assets in this category have replacement value approximately
equal to book value. Categories a and b are the categories for which the
SEC has required replacement-cost information. In constructing the
time series of replacement costs, we use the following notation:
TAt
HNPt
RNPt
HINVt
RINVt
=
=
=
=
=
total assets as reported in year t,
net plant at its historical value in year t,
net plant at replacement cost in year t,
inventories at historical value in year t, and
inventories at replacement value in year t.
Total replacement cost (RCt) is defined as
RCt
TAt + RNPt
-
HNPt + RINVt
-
HINVt
(17)
for the years of SEC reported data, 1976 and 1977. Prior to 1976, we
will consider plant and equipment and inventories separately.
The replacement cost of net plant and equipment will change over
time as a consequence of four major effects: (1) price level changes
(increase RNP), (2) technological change (decrease RNP), (3) real
economic depreciation (decrease RNP), and (4) investment in new
plant (increase RNP). Given the investment in new plant and equipment series It, the following recursive relation was developed:
RNPt
= RNPFl[
(1
+
t
)
+ It,
t
1,
(18)
where 0 is the base year (in our case 1952),5 kt is the rate of growth of
capital goods prices (for this firm), at is the rate of (real) depreciation, Ot
is the rate of cost-reducing technical progress, and the hat above RNP
implies that the value is estimated.
14. The accuracyof these dataand the variability the methodsused to constructthe
in
figuresis discussedat lengthin reportsby the accounting
firmsof Arthur
Anderson& Co.
(1977) and ArthurYoung & Co. (1977). For example, the SEC does not put stringent
requirements the reportingof foreign assets at replacementcost.
on
15. AlthoughCOMPUSTAT begins its data series in 1946, it is necessary to begin at a
later date in order to guaranteecomplete data series for a sufficientlylarge sample of
firms.

15. Journal of Business
14
Continuingthe recursion, we obtain
t
t
-
1+O
(1
HS+lL +)s)(
RNPt
+ s)
+ HNPOH
IH
(1
(1
)1 + OsOs)'()
)
+
+
+ 5s)(l
(19)
where HNPo is the book value of net plant in year 0.16 Since no
satisfactoryand sufficientlycomplete measuresof technicalprogressat
the firm level could be found, these were computed endogenously in
one of two ways. First, by using the formula(18) for the years 1976and
1977 we obtain
=
RNP1977 RNP1976
1+ 01i977
+ 01977)
(1 + 81977)(1
20
I17,
(20)
If we assume the rate of technicalprogresswas constantfor a sufficient
periodpriorto 1976,the solutionfor 01977can be used as an estimatefor
t < 1976. The difficultywith this method is that it uses depreciation,
inflation, and investment informationfor 1 year only in order to estimate 0 for many years. An alternativeis to calculate0 directlyfrom the
formula (19) for each of the years 1976 and 1977 by solving
t
RNPt
='(I
Tr=0
t
+
~~~~~~~~~+HP01+0t
11
0)Tt
I
s=t+Tr
+
+'I
+
HNP (1 + 0)-t
Ts'
H
=OI+
I+O
(21)
5
(t = 1976, 1977) and then averagingthe two solutions.17These measurementsof technicalprogressat the firmlevel could be aggregatedto
the industry level and might be of some independentinterest.
To obtainan estimate of the capitalgoods price index, t, we use the
GNP deflator for nonresidential fixed investment. The depreciation
rate was computed in our study by the formula
EHNPt
(22)
where DEPt is book depreciation. This formula assumes that the real
fraction of the (net) assets which depreciatein a given year is equal to
the book fraction. This has the virtue of eliminating much of the
differencebetween measuredand tax-adjustedreplacementvalues that
However, for years of interest
16. To be precise, HNPoshouldbe replacedby RNPO.
laterthanthe base year, the differencebetween the real value of the undepresufficiently
ciated part of the base year capital and its book value will be negligible.
17. In reality, the value of 0 calculated by this procedure represents not only an
effects that
estimateof technicalprogressbut includesotherfactors, such as inflationary
replacementcosts, and errorsin
differfrom the price index, omittedfactors influencing
measurementof variables. We refer to 0 as the rate of technical progress in that we
believe that this is its majorcomponent.

16. Tobin's q Ratio and Industrial Organization
15
comes from differences between exponential and straight-linedepreciation schedules. Using these estimates, a time series of RNPt can be
constructed for each firm from (18).
The other component of replacement cost is the inventory value,
RINV. Since different firms use different methods for inventory accounting (e.g., first in, first out [FIFO]; last in, first out [LIFQ], or
average cost methods), in principle, different adjustments to book
numbersmust be considered for each one. In practice, the differences
in FIFO and LIFO methods, for example, have a substantialeffect on
the estimated investment series for firms with large inventory positions. In an inflationary
period, LIFO will underestimatethe change in
inventory value and, as a consequence, the true inventory investment
and total actual investment will be understgtedby the difference in
book values. The following adjustments Were made for the major
methods of inventory valuation reported to Compustatby individual
firms.18
LIFO. In this system, units of output sold are assumedto be the most
recently purchased units. Consequently, the took value of units of
inventory still on the shelf will reflect prices thatunderstatethe cost of
replacementin inflationarytimes. Our adjustmen't
takes account of the
larger undervaluationof old inventory and a smaller underpricingof
more recent increments:
RINVt = RINVt_
(
I )
Pt-1
+ (HINVt - HINVt-1)
5(Pt + Pt-1),
Pt-,
(23)
where Pt is the price index appropriateto inventories.
FIFO. In this system, inventories are assumed to be used up in the
order in which they were produced. Thus, remaininginventories will
be priced on the books at the most recent prices. In fact, if remaining
inventories were all producedduringthe most recent period, a reasonable approximationis
RINVt = HINVt.
(24)
Average cost method. In this method, inventory is reportedat time t
at roughly an average of the prices at t - 1 and t. Thus our approximation to replacement cost of inventories in this case is
18. Othermethodsinfrequently
used by firmsare specificidentification,
standard
cost
methods,andcurrentreplacement
costs. In these cases, we used the methoddescribedin
the text closest in descriptionto the infrequentlyused method. Also, where several
methods were cited for a given firm, the method cited as dominantwas used.

17. Journal of Business
16
RINVt
=
HINVt
(F2+Pt1
(Pt + Pt-1)
(25)
(5
Retail cost method. In this method inventoryquantitiesare priced at
the expected retail prices. Since producersnormallysell at wholesale,
our correction is
RINVt = HINVt Wholesale Price Index
Retail Price Index
(26)
(6
we
Using equations(23)-(24) where appropriate, can findRINVtfor all
can then compute the total replacement-cost
years prior to 1976. We
series, RCt, by combining RINVt RNPt in equation (17). To avoid
any errors introducedby using HNPO,we will discard the beginning
periodof the samplefor each firm,from 1952through1959,and confine
our analysis to the 1960-77 period.
LettingMt denote the estimatedmarketvalue of the firm(from[16]),
t
we can now construct the series of qit = MitIRC?t, = 1960,
.,
1977,
where i indexes firms.
We have already noted that the idiosyncracies of the accounting
conventions make economic interpretationof inventory and investment difficult. The principalproblem with the investment and capital
price series, though, is less one of measurementerrorsand more one of
the significanceof recordedtransactionsprices generatedin the capital
goods market itself. The capital goods industry is highly procyclical,
but there is little evidence of this cyclicity in the actual movement of
capital goods prices. In an industry with large fixed costs, it is only
naturalthat quoted prices will misstate the true costs of acquiringnew
capital goods. Cost considerationslead the industry to insulate itself
fromthe cycle by producingfor the long run. Thus, explicit and implicit
long-runcontracts will be importantcomponents of the capital goods
price index. When the demandfor capitalfalls off, actual transactions
prices for spot transactionswill decline and longer-termprices will be
more sluggish. In periods of high demand, whether the market clears
by having demandersqueue at posted prices or whetherthere is a dual
system of high spot and lower long-termprices, the effect will againbe
to smooth the capital goods price index below the true current spot
price. This suggests, of course, that for rapidlygrowingfirms,we might
have growth outpacinginvestment and entry. In this case, q would be
biased upward, overstatingthe true bound for monopoly power. What
we would really like to have is a series of the "gray" or shadow prices
rather than the posted transactionsprices.
This inherentsluggishnessin the recordedprice index is, of course,
reflectedinRC, makingit muchless responsiveto marketforces than is
M. Another source of the relative slow variationin RC is the presence

18. Tobin's q Ratio and Industrial Organization
17
of delivery and order lags. In industrieswith "sticky" capitalwhich is
not adjustedto meet currenteconomic effects of the cycle, spot prices
will be biased away from the true replacementvalue of the assets. The
quoted price may be a spot price, and the relevant currentprice for
evaluating replacement cost is not current spot price but a price for
forwarddelivery. In this sense, in a period of risingprices, spot prices
will understatethe relevantprices for evaluatingreplacementcost. Not
only will there be a timingproblem, but the lags imply the presence of
real costs to the acquisition of new capital equipmentthat are understated in current capital prices. As a consequence, RC will tend to
understate true RC. Furthermore, to the extent to which shifts in
demand and supply conditions are accommodatedby changes in the
order and delivery lags, prices will respond with a dampenedlag and
will move less rapidly than true replacementcosts.
The sluggishnessin RC impliesthatqcwill displaya greateramplitude
than q. This property underlines much of the hope that qc will have
explanatorypower as an independentvariable in determininginvestment. (It is ironic that if qc exactly tracked q-and if there were no
distinctionbetween marginalq and averageq-it would lose its value
as a determinantof investment.) But, for our purposes, we are interested in trueq itself and not in qc, and we will use qcas an estimateof q.
Two other problemsdeserve mention. First, the treatmentof advertising expenditureshas been in accordance with standardaccounting
principles, which is to say that we have expensed them. To some
extent, though, advertisingis a capital investment and to omit it will
bias replacementcosts downwardand q upward.If advertisingcapital
depreciatesrapidly,we would expect this effect to be relatively minor.
Furthermore,since overall advertisingexpendituresare small relative
to replacementcosts, for most firms such a correctionwould be small,
and we have chosen to ignore them. Similarqualificationsapply with
regard to expensing research and development expenditures.
Perhaps a more serious omission is the understatementof firmspecific trainingcosts in investment. Firms which engage in specific
trainingmust offer their workers a premiumover jobs which have a
higher component of general training. This premium is largely expensed in the wage bill but properly should be added to total investment. Here, too, we tend to bias q's upward.
IV. EmpiricalAnalysis
The averagesof q, denoted as qi = 1/18Zt=1960 are reportedfor each
qit
firm in table 2. Our sample selection will be described a bit later. If
there are no systematic biases, qi will provide an adequatemeasureof

19. Journal of Business
18
Table 2
Firms and Average q Values
Company
ACF Industries
AMF, Inc.
Abbott Laboratories
Akzona
Alcan Aluminum, Ltd.
Allegheny Ludlum Industries
Allied Chemical Corp.
Allied Products
Allied Stores
Allis-Chalmers Corp.
Alpha Portland Industries
Aluminum Co. of America
Amcord, Inc.
American Brands, Inc.
American Can Co.
American Cyanamid Co.
American Greetings Corp.
American Telephone and
Telegraph
Ametek, Inc.
Anchor Hocking Corp.
Anheuser-Busch, Inc.
Armstrong Cork Co.
Asarco, Inc.
Avon Products
Bausch and Lomb, Inc.
Beatrice Foods Co.
Bell & Howell Co.
Bethlehem Steel Corp.
Borden, Inc.
Borg-Warner Corp.
Bristol-Myers Co.
Brunswick Corp.
Bucyrus-Erie Co.
Carter Hawley Hale Stores
Caterpillar Tractor Co.
Ceco Corp.
Celanese Corp.
Certain-Teed Corp.
Champion International Corp.
Chicago Pneumatic Tool Co.
Chrysler Corp.
Cincinnati Milacron Inc.
Cities Service Co.
Clark Equipment Co.
Cleveland-Cliffs Iron Co.
Cluett, Peabody & Co.
Coca-Cola Co.
Colgate-Palmolive Co.
Collins & Aikman Corp.
Combustion Engineering, Inc.
Commonwealth Edison
1960-77
Average
q
Ratio
1.14
1.43
2.35
1.02
.79
.97
1.26
1.07
1.17
.76
.68
.85
.92
1.23
1.09
1.46
1.94
1.09
1.46
1.17
1.95
1.70
.91
8.53
2.37
1.65
1.64
.68
1.26
.97
3.76
1.23
1.08
1.28
1.52
.84
1.24
.95
1.35
1.13
.90
1.17
1.21
1.51
1.17
1.12
4.21
1.34
1.13
1.14
1.01
Company
Cone Mills Corp.
Congoleum Corp.
Continental Group
Continental Oil Co.
Cooper Industries, Inc.
Copperweld Corp.
Corning Glass Works
Crane Co.
Crown Cork & Seal Co., Inc.
Crown Zellerbach
Culbro Corp.
Cummins Engine
Curtiss-Wright Corp.
Cutler-Hammer, Inc.
Dan River, Inc.
Dart Industries
Diamond International Corp.
Diamond Shamrock Corp.
Dome Petroleum, Ltd.
Dow Chemical
Du Pont (E. I.) De Nemours
Duquesne Light Co.
Eastern Gas & Fuel Assoc.
Eaton Corp.
Ethyl Corp.
Exxon Corp.
FMC Corp.
Fairchild Camera & Instrument
Federal-Mogul Corp.
Federal Paper Board Co.
Federated Department Stores,
Inc.
Ferro Corp
Flintkote Co.
Foote Mineral Co.
Foster Wheeler Corp.
GAF Corp.
GATX Corp.
Gamble-Skogmo
Gardner-Denver Co.
General Cable Corp.
General Electric Co.
General Foods Corp.
General Motors Corp.
General Portland, Inc.
General Refractories Co.
General Telephone & Electronics
Georgia-Pacific Corp.
Gillette Co.
Goodrich (B. F.) Co.
1960-77
Average
q
Ratio
.45
1.17
1.15
1.69
1.24
.69
3.75
.72
1.41
1.08
1.07
1.35
.95
1.35
.67
1.41
1.50
1.55
2.94
1.62
2.47
.90
1.11
1.17
1.48
1.05
1.47
2.12
1.35
.52
2.06
.97
.86
1.07
.86
1.27
1.10
.97
1.57
1.64
2.07
2.10
1.59
1.09
.70
1.32
1.63
3.92
.89

20. Tobin's q Ratio and Industrial Organization
Table 2
19
(Continued)
Company
Goodyear Tire & Rubber Co.
Grace (W. R.) & Co.
Graniteville Co.
Great Northern Nekoosa
Corp.
Grumman Corp.
Gulf Oil Corp.
Halliburton
Hammermill Paper Co.
Hercules, Inc.
Hershey Foods Corp
Holly Sugar Corp.
Honeywell, Inc.
Ideal Basic Industries, Inc.
Imperial Oil, Ltd.-CL A
Ingersoll-Rand Co.
Inland Steel Co.
Insilco Corp.
Interco, Inc.
Interlake, Inc.
International Business
Machines Corp.
International Paper Co.
Iowa-Illinois Gas & Electric
Iowa Power & Light
Johns-Manville Corp.
Johnson & Johnson
K Mart Corp.
Kaiser Aluminum & Chemical
Corp.
Kaiser Cement & Gypsum
Corp.
Kaiser Steel Corp.
Kellogg Co.
Kimberly-Clark Corp.
Koppers Co.
Kraft, Inc.
Libbey-Owens-Ford Co.
Liggett Group
Lilly (Eli) & Co.
Lone Star Industries
Long Island Lighting
Lowenstein (M.) & Sons, Inc.
Lucky Stores, Inc.
Lukens Steel Co.
Mallory (P. R.) & Co.
Marathon Oil Co.
Maremont Corp.
Marshall Field & Co.
Maytag Co.
McGraw-Edison Co.
McLouth Steel Corp.
1960-77
Average
q
Ratio
1.05
1.16
.55
.79
1.06
1.25
1.86
.68
1.86
1.83
.50
2.28
1.08
1.67
1.76
.95
1.39
.98
.75
4.21
1.17
.85
.73
1.24
3.64
1.99
.80
.96
.78
3.20
1.51
.88
1.35
1.47
1.02
4.02
.89
1.28
.61
1.58
.74
1.22
1.81
1.24
1.14
2.71
1.28
.74
Company
Mead Corp.
Medusa Corp.
Melville Corp.
Mercantile Stores Co., Inc.
Midland-Ross Corp.
Minnesota Mining & Manufacturing Co.
Mobil Corp.
Monsanto Co.
Motorola, Inc.
NCR Corp.
NI Industries
Naico Chemical Co.
National Distillers & Chemicals
National Gypsum Co.
National Steel Corp.
National Tea Co.
Owens-Corning Fiberglass
Corp.
Owens-Illinois, Inc.
PPG Industries, Inc.
Pabst Brewing Co.
Pennwalt Corp.
Pepsico, Inc.
Pfizer, Inc.
Phelps Dodge Corp.
Philip Morris, Inc.
Phillips Petroleum Co.
Pitney-Bowes, Inc.
Polaroid Corp.
Potlatch Corp.
Public Service- Electric & Gas
Publicker Industries, Inc.
Pullman, Inc.
Quaker State Oil Refining
RCA Corp.
Revere Copper & Brass, Inc.
Reynolds (R. J.) Industries
Reynolds Metals Co.
Robertshaw Controls
Robertson (H. H.) Co.
Rohm & Haas Co.
Rubbermaid, Inc.
SPS Technologies, Inc.
Safeway Stores, Inc.
St. Joe Minerals Corp.
St. Regis Paper Co.
Schering-Plough
Scott Paper Co.
Scovill Manufacturing Co.
Searle (G. D.) & Co.
1960-77
Average
q
Ratio
.97
.60
2.21
1.27
1.02
4.87
1.20
1.38
1.97
1.74
1.56
3.69
.94
.92
.53
.97
1.71
1.30
1.05
1.31
1.36
2.31
2.49
1.71
1.45
1.74
1.92
6.42
.82
1.12
.59
.91
1.92
1.67
1.17
1.90
.81
1.11
.89
2.09
2.03
.80
1.14
1.91
.98
4.30
1.46
1.05
5.27

21. 20
Table 2
Journal of Business
(Continued)
1960-77
Average
q
Ratio
Company
Sears Roebuck & Co.
Shell Oil Co.
Signal Cos.
Signode Corp.
Simmons Co.
Singer Co.
Smithkline Corp.
Southern California Edison
Co.
Square D Co.
Standard Brands, Inc.
Standard Oil Co. (California)
Standard Oil Co. (Indiana)
Standard Oil Co. (Ohio)
Stanley Works
Sterling Drug Inc.
Stewart-Warner Corp.
Sun Co.
Sunbeam Corp.
Sundstrand Corp.
Super Value Stores, Inc.
TRW, Inc.
Texaco, lnc.
Textron, Inc.
Timken Co.
2.04
1.68
.99
1.69
.90
1.22
4.19
.81
2.68
1.87
1.18
1.24
2.09
.96
3.46
1.20
1.26
1.36
1.17
1.35
1.32
1.86
1.12
1.02
Company
Trane Co.
Trans Union Corp.
UV Industries, Inc.
Union Camp Corp.
Union Carbide Corp.
Union Oil Co. of California
Uniroyal, Inc.
United Brands
U.S. Gypsum Co.
U.S. Steel Corp.
U.S. Tobacco Co.
United Technologies Corp.
Wallace-Murray Corp.
Warner & Swasey
Western Publishing
Western Union Corp.
Westinghouse Electric Corp.
Weyerhaeuser Co.
White Motor Corp.
Wickes Corp.
Wisconsin Public Service
Woolworth (F. W.) Co.
Wrigley (WM.) Jr. Co.
Xerox Corp.
Zenith Radio Corp.
1960-77
Average
q
Ratio
1.82
1.47
1.48
1.43
1.67
1.24
.90
.74
1.22
.62
1.67
.94
.81
1.01
1.33
.83
1.48
1.76
1.12
1.60
.79
.84
1.74
5.52
2.83
true qi and, if we assume thatcqit = atqi and defineqt 1/N
it, then
is a measure of the relative value of rents earned by firm i.
qitlqt
However, since our aim is to constructq measureswhich can be used
to comparemonopoly and ordinaryrents across firms,to the extent to
which there are biases which are common across firms-and the use of
a common price index means that most of the biases will be
common-we should attempt to correct the raw q values. Several
approaches are offered below.
The relative variable defined above is one way of dealing with the
problems arisingfrom intertemporal
changes in q levels. By averaging
across firms,we could arguethat individualfirmerrorsshouldwash out
in computingqt. The secular variationin qt will measurethe impact of
the sluggishresponse of RCt and to assess the impact at the firmlevel,
we must remove the variation in qit with the general trend. One approach is to estimate the regression
qit = ai + bi(4t - q) + (its
where
(27)

22. Tobin's q Ratio and Industrial Organization
q
1
21
q
Now ai will serve as a measure of the long-run value of qi for the firm.19
An allowance should also be made for the presence of dying firms
(firms which are not replacing their capital stock). Since such firms will
have their true q below unity, we must correct their q to measure the
value of rents earned above their return on invested capital. If we
assume that investment at time t occurs in response to differences
between PVt and ct, we can use the normalized difference between
investment in plant and equipment, on one hand, and depreciation on
the other, as a proxy for this difference. Defining 'it min [0, (Iit DEPit)/TAit], one measure of true qi can be found from the regression
qit = ai + bi(4t - ') + ci
+ (
(28)
(We also tried (kit - gi) as an alternative.) Here git measures the extent
to which firms are not replacing their capacity. Now ai will be a
measure of true qi that is corrected for the dying-firm phenomenon.
Then, to obtain the corrected value of q at each point in time for firm i,
denoted by hit, we have
4it
ai + (it,
(29)
where (it is the calculated residual after performing the regression (28).
Alternative formulations to (28), including log-linear forms and the use
of weighted averages for q, were also run, but the results described
later in this section were not significantly affected.
The residual ( is probably best interpreted as describing that portion
of firm i's q value that is not explained by economy-wide movements in
average q. Of course, to the extent to which the movements in the
average q are secular movements in the true underlying q for the
economy, this procedure will tend to overcorrect. In particular, in a
period of declining q it will remove some of the true decline in a firm's
q, and the adjusted trend of q for individual firms will be biased upward
from the true trend.
Another possible variant of (28) would remove the minimum function
in the definition of git so that (28) will also adjust downward the q
values for those firms and industries which are experiencing an increase in demand that increases PVt above ct for current investment.
the
19. We recognize the fact that in performing regression(27) separatelyfor each
firm,the coefficientsof the last regressionwill be functionsof the othercoefficientsdue
to the definitionof qt. However, with a sufficientlylarge sampleof firmsthis shouldnot
be a significantproblem. We also tried variations of (27), e.g., a log form, but the
resultingempiricalanalysiswas not very sensitiveto the specification,andfor simplicity
we have not reportedthese results.

23. 22
Table 3
Journal of Business
Adjustment Coefficients for q
Definition 1:
g
Iit-
Definition 2:
DEPit
TAt
i
=i
m
)
Iit - DEPit
(
TADEPt
hi
NOTE.-Sample size
ei
130
239
201
228
10
15
116
230
7
21
45
2
=
hi
236
Positive (N)
Significantly > 0
at 5% level (N)
Negative (N)
Significantly < 0
at 5% level (N)
ej
8
2
4
246 firms;N = numberof firmsin each category.
As we observe above, the capital goods price index does not measure
true acquisition cost in this case, since demanders are queuing for
investmentgoods. This may occur even though the firmis not exercising monopoly power. In addition, for firms with heterogeneous mixes
of capital goods we cannot conclude that no capital is being replaced
simply because depreciationexceeds investment. Of course, the correction is only an approximation both cases, and it is not clear from
in
the theory alone which form better fits the data. If there is a correlation
between growth and true q, we will overcorrect, so that ai will underestimate the true value of qi for high-growthfirms and overestimate it
for dying firms.
From the sources listed in table 1, data for an initial sample of over
500 firms, for which SEC 10-K informationwas at least in part available, was collected. Firms were eliminatedwhen complete 10-Kinformationin 1976-77 was not available. This left 257 firmsin the sample.
When a furthercheck was made for adequate informationfor calculation of Lerner indices in the next section, the sample was reduced to
246 firms.Table 2 lists alphabeticallythe firmsin the samplealong with
their respective unadjustedaverage q values.
The results of the regressions described above are summarizedin
table 3. Using definition 1 (in table 3) for 'it, we find that an overwhelmingpercentageof the bi coefficients had significantpositive signs
at the 5%level. This confirmsour intuitionthat bi reflects the responsiveness of measuredqi to economy-wide changes in valuations. We
would also expect ci to be positive, but approximately equal number
an
had positive and negative signs, although these results were insignificantat the 5%level. The results from definition2 of 'it in table 2
were not significantlydifferent, althoughthere was a slight increase in
the number of positive ci values. Evidently, the dying-firmeffect is
more importantthan the supergrowtheffect, althoughneitherof these

24. 23
Tobin's q Ratio and Industrial Organization
3.0
2.5
/
/TIbi-9j<d
/
/A
2.0
~~~~~Lindenberg-Ross'
1.5
-
1.0
Vn-Fu
'*@-Fourt
I
1960
**.**
I I
1961
I
1962
enbeg*
I
I
1963
1964
1966
I
1966
I
I
1967
1969
I
1969
I
I
1970
1971
I
1972
I
1973
1974
I
I
1
1975
1976
1
1977
Year
*-Year E Ad
FIG.
q
2. -Economy-wide ratios
variablesadds much to the adjustmentof q . In fact, we have not listed
the values of d, for the firms in the sample since the average adjusted
value of q differs very little from its unadjustedvalue. Of course, the
actualtimeseriesof adjusted = d, + {it differsfromthe unadjusted
cjit
cht series and, for some firms in the sample, the difference between d,
and'-i is significant.
To compare our findingswith other studies of q, we plot in figure2
the average value of q (unadjusted)for the years 1960 through 1977,
and the economy-widevalues of q reportedfrom three sources: (1) the
Economic Report of the President(1978), (2) the year-endnumbersin
von Furstenberg(1977),and (3) the averageq values reportedin Tobin
and Brainard(1977). We have also plotted the time series of adjusted
values of q, averaged over our firms, from our study. The relatively
constant value (approximately1.5) indicatingthat the capitalizedrents,
earnedby firmsin our sample, have been sufficientto keep the average
firm's marketvalue approximately50%above the replacementcost of
its assets. Figure 2 also indicates a high degree of correlationbetween

25. 24
Journal of Business
the q as we have measuredit and each of the other methods, although
there are consistent differences between each of the estimates.20
Whataboutthe distribution q across firmsand industries?Figure3
of
presents histograms for adjusted q across firms for the years 1960,
1965, 1970, and 1977. From these plots we see that the distributionof
adjusted q ratios was approximatelyunchanged. The only apparent
change is a reductionof some of the extremely large values of q over
time. As we have previouslynoted, largeq values shouldbe associated
with either significantmonopolyrents or with rent resultingfrom some
special factors employed by the firm, all of which influence market
power. In table 4, industry averages are listed in ranked order of
overall average adjustedq. Many of the industries with the highest q
values contain firms successfully marketing differentiatedproducts
(e.g., cereals, drugs, cosmetics) or having strong patent protection
(e.g., photo, drugs).Some industriescontainingfirmswith largemarket
shares also rank highly, althoughsuch firms are scattered throughout
table 2,21 and we will test this explicitly below. We have suggestedthat
low values of q are associated with a relatively competitive market
structure,a tightlyregulatedmarketstructure,or a dying-industry
firm,
and a casual reading of table 4 appears to confirm this. Steel and
primary metal manufacturersrank low, perhaps reflecting the depressed natureof these industriesrelative to foreign substitutes. Also,
the regulatedsector, for example, electric utilities, has relatively low
q values. Furthermore,many firmsin other industries(e.g., petroleum
refining)which are regulated in some form are noticeably below the
upper ranges of the distributiondespite the conventionalwisdom concerning the oligopolistic nature of their business.22
Finally, as a test of significance,we examined the adjustedaverage
q ratios for individual firms to see whether the monopoly power as
measuredfrom the data was significantlyabove the theoreticalcompetitive level of 1.0. While the individualyear-by-yearq values can be
thought of as independentdrawingsfrom a populationwith unknown
20. These other procedures, used to calculate q for the economy, have employed
differenttechniquesto measureeither aggregatemarketvalue or aggregatereplacement
cost and are not quite comparablewith our results. For example, both the Council of
Economic Advisers and von Furstenbergproceduresuse flow of funds and other data
aggregatesrather than estimates for a sample of individualfirms, and, in fact, their
measures of replacementcost appearto be more reflective of reproductioncosts, for
which much of the effect of technicalchange is absent. Such an omission would push
measuredreplacementcost up and measuredq down.
21. Anotherreasonfor ranking
high on the list mightbe a unique sales and marketing
not
organization easily replicated(Avon, IBM). A reason, not includedin the text, for
rankinglow mightbe the ability of suppliers(e.g., unions) to appropriate
some of the
rents earned in output markets.
22. In severalcases, the numberof samplefirmswithina given industryis quite small.
Some care is needed in makingsignificantstatementsconcerningrelativemarketpower
in these cases.

26. -y-rrn-rr
90
o~
O,F~rT
~ ~~ ~ ~~
0
In~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 t
Hin?'~~~~~~~~~~~~i
0
o0
lo
lo
o
*
l
L
-O N
7
V
%
swji
CIlI
T*-I
o
C
%
I
:A :-
0
Ca
s~~~~~
0~~~~~~~~~~~~~~~C
p4
2'2~~~~~~c
"
0~~~~~~~~~~
~ ~
00~I
C4N
swij
o
C!~N
0
2~~~~~~~~~~2
Li
00
t
0~~~~~~~~~~~~~~~CC
Ci
C?
40
sw(j!
t?
0
L
[
C
li
= C)
I0O%
0I0n
N
0
00
aW0
SWii
00j0
%
25

27. c
Cl
X
"'t
CN
0
W) "T X
r,4
"T
(ON (14 t-
0
0
W) el
ON"It m aN c
C C cli
en en
OC)
cli C
C
c
aN ,,t cq
=
W) "It
INC
M
C)
"T cl,
CD c
a
W
,,t
t--
00
"It "It w
't
W
Nt
ON (ON W) m
m
W
aN "T m
cq C14 cq
m
cq
0
tC14
"t
=
W
W)
ON W
W,-tt
"T
c-,
Rt
ON 0
-4
m
eq W)
CN
W W
m
'Itt "It
Itt
o
w
c
c
a,
w
,,t
"'t kn m
W) C) aN
(7N= CN
aN W -
-
C C m "t m M
W (7N
(ON W
-
t,-
C)
m
-
-
aN
-
m
"t
t-
m r-
c
(7
c
t-
W
c
cli
"It t__ tl-
en
kn
cq
-
00 C 00
OC) "t a
cp
,,t en Cl kr)
kn
tl-
W) "It
m
m
C
0
kr) t-
c
c
C)
Cf) en c
en ON en
m
C)
't
ON "
en
cq
W) c
en
ON
CD c
en
aN -
OC) en
W) m
cl 00 O ,,t M C
W)
(14 -
c
en
C
-
W)
cl
It
'IT en
en
c
c
en
00
-
It 00
0 00 te)
cq
r- ON en
(ON C)
ON -
W
(7
C)
m
C)
El
kn
CD ON kr) C c
(7N CA "
ON ON t-
"It 't en en "It Cf)
en t__ 00
(ON ON
C
ON
r- 0
(1) Cd
( 4-0
00
C's
C)
ce
cd
Cd
w
C)
,,t
C)
-
M
(ON c
C
r- ON-
t__ c
r- o
'It "t llt W) ,,t kn c so "t
r- - c m t- "t a, W ,t 1%c c
tm
aN ON W)m ,,t M M
(7N r-
"T
m
W) 't
w
Nt
(Ii
(=
(ON "
,,t - ,,t
cf & cli
Ei
0.)
0
C)U,W,)
u
Cd
m
0
u
=
U
cd
El
0
W I.- O
to
1-4
26
t-
tl- en cq tn kr) (7Nt- 00
M It "T
cq m -
"It "It
"
t-
Cfi lr cli
C*l U
W
0
(Ii (Ii
C
00
0 0
0-4
r-
=
IRll ,I:11-t 111: "ItI-qen
V: t-:
't Nt c CD w w cl 'Itt 10 r- W ,,t W
t__ W) t- tl-- W) "It 't 't
W)
cli cli cli
c
m
r- r- 00 tc "T -
a "'t c
00
-,--q
M
_ O 13 lr
C cli
>
r-
"t
C"! rl
O
'15
cd
El
m
v)
,0
z
00 cols,
cd
(L)
Ctff = El Cd
0 C)
0
El
uw 0
X
ON
kn
cd
0
kn
24
-
8
m
v)
0
cd
0 El
cd
C,3
z
6, El
u
P u ,: 4 u 4. w 4.
O
m
4.)
0 r"
0 z
El
IL)
u
a
m
r.
u
;D
7
tm
0
in.
'IC m
-
c
w
c,3 1-4
't
%
C,3
El
kn
m

28. 27
Tobin's q Ratio and Industrial Organization
mean, the distributionis not known, and the sample size of 18 years
may not be sufficient to use a t-statistic for significance tests. Consign test to test the
sequently, we employed a one-sided nonparametric
null hypothesisHo:qi = 1 againstthe alternativehypothesisH1:qi > 1.
At the 5% level, it was found that 159 of the 246 firms had q ratios
significantlyabove one, while for the others, the estimated values do
not permit us to rule out the possibility of no monopoly rents.
V.
Comparisons with Other Measures of Monopoly Power
In this section, we examine the empiricalrelationshipbetween q and
two of the most commonly used measures of monopoly power, the
Lerner index and the four-firm concentration ratio. The four-firm
data (based on value of shipments)was taken from
concentration-ratio
the 1972 Census of Manufacturers (U.S. Departmentof Commerce
industriesby four-digitSIC code.
1972)for each of the manufacturing
Includedon the COMPUSTAT tapes are the four-digitSIC codes, but, in
some cases, adjustmentswere made on the tapes to account for a firm
doing significant business in several industries with, say, the same
three-digitcode. For example, if a firm was significantlyinvolved in
industries 2011, 2012, 2013, .
..
, the recorded SIC code would read
2010. Consequently,it was necessary to construct averages (weighted
by value of shipments)for all three-digitcodes, two-digitcodes, and so
forth. For each firm, there is an associated concentrationratio representing the share of value of shipmentsin 1972of the four largestfirms
in its "industry."
Lerner indices can be constructed using firm-specificdata alone.
Because we lack adequatemarginalcost data, we assume that average
variable cost equals marginalcost. If the firmproducesa homogeneous
product, Lerner's index will be given by
P -MC
P
_P
- AVC
P
PQ - AVC
PQ
Q
Sales-OperatingExpenses
Sales
Letting Lit and CRit denote, respectively, Lerner's index and the
four-firmconcentrationratio for firmi in year t, we regressedqit on Lit
for the entire 1960-77 period and qi,1972 on Li,1972and CRi 1972for the
year in which census data was available. The results are reported in
table 5.
All of the coefficients have the predicted positive sign. The Lerner
index is, from all three regressions, an importantcontributortoward
explaining monopoly and Ricardian rents. The concentration ratio,
however, seems to have no significantrelationshipwith q. Evidently,
high q's can occur in concentrated or unconcentratedmarkets and,

29. 28
Journal of Business
Table 5
Regression Results
Regressions
4it
=
q i,1972
q
i,l972
Indices
i = 1,.
1.03 + 3.10Lit
(19.59)
=
1.46 + .27 CR i,1972
(0.63)
=
.19 + 8.28 L i,1972 + .04 CR i,1972
(11.27)
(0.11)
NOTE.-Numbers
246 t = 1960,.
r2
1977
.08
i indexes manufacturing-sector firms
.01
i indexes manufacturing-sector firms
.29
in parentheses are t-values.
conversely, low q's, indicatingno significantmarketpower, can occur
in markets that have high degrees of concentration.
The values of r2 in these regressionsare not unreasonablefor crosssection regressions. But, recallingthe basic Propositionof Section II,
we see that Lerner's index only provides a lower bound for q which
also dependson the ratioof marginal averagecost. The lower bound,
to
then, will be lower for firmswith high fixed costs and/oreconomies of
scale. If actualq moves with the bound, we shouldexpect it to be lower
for firmswith higherdegrees of scale economies or higherfixed costs.
In these cases, the Lerner index is inadequate in explaining market
power because it does not recognize that some of the deviation of P
from MC comes from either efficient use of scale or the need to cover
fixed costs and does not contribute to market value in excess of
replacementcost. An example of this phenomenonoccurs for regulated
utilities. Their Lerner indices are significantlyhigherthan the average
for all firms,and yet they have q ratios amongthe lowest in the sample.
These are firms with large capital investments, high fixed costs, and
significantscale economies duringthe study period.
As a direct test of the Proposition presented in Section II, we
construct the- statistic [1/(1 - L)] [MC/(AVC + AFC)] for each firm in
each year of the studyperiod. Accordingto the Proposition,this should
be a lower bound for q. Assuming, again, that marginalcost equals
averagevariablecosts, and, in addition,that total fixed cost in a given
year equals an interestrate (an annualization
factor)times replacement
cost, we test the hypothesis
Hl: qi >
i
1)AVC
)
AVCi + rRC )
1
(1 -Li
against the null hypothesis
=
HO:qiq
I
I
I
-L
Li
AVC,
AVCi + rRCiJ
Table 6 reportsthe results of performing nonparametric test of
a
sign
the hypothesis for the values r = .05, .10, .15 and for an interest

30. Tobin's q Ratio and Industrial Organization
Table 6
29
Lower Bound Tests for q*
Interest Rate r (%)
5
Firms with q above theoretical bound
at 5% level (N)
Firms with di above bound (%)
10
15
5-15
126
150
168
152
61
67
73
71
*Test of q ? (1/1 - L) (MCIAC),where L Lerner index, MC
Average cost averagevariablecost + r replacementcost.
marginalcost, and AC-
starting at .05 in 1960 and rising uniformly to .15 in 1970. We list, for
each value of r, the number of firms for which Ho is rejected in favor of
H1 and the percentage of firms whose adjusted q ratio, di, is above the
hypothesized bound, evaluated at average values of its components.
The majority of firms have average adjusted q ratios that exceed the
bound. The test results indicate that Ho is rejected with a frequency
much greater than chance, suggesting that the proposition indeed
holds. As is shown in table 6, these results are relatively unaffected by
the assumptions on the cost of capital.
VI.
Summary and Conclusions
We have developed in this paper a model which enables us to examine
the extent, distribution, and history of monopoly and quasi-rents in the
industrial sector. This model uses the linkage between financial price
data and accounting data to construct empirical measures of supercompetitive market power for individual firms. The work grows out of
the pioneering work of Tobin, who recognized that the relation between market value and replacement cost is crucial in the investment
decision making process.
Our results show a wide dispersion of market power across firms and
industries. For the economy as a whole, the raw data is consistent with
findings elsewhere that market value as a percentage of replacement
cost has declined over the past 2 decades. After adjusting for
economy-wide effects and firm effects that do not influence market
power, we find that, on average, market values have been approximately 50% above replacement costs over the period 1960-77. We also
have shown that the dispersion of monopoly power has not changed
significantly over this period. Our results indicate that the sectors of
the economy that have q ratios at the high end of the spectrum are often
those with relatively unique products, unique factors of production,
and so forth, all of which contribute to monopoly and/or quasi-rents.
At the low end, we find either relatively competitive, tightly regulated,
or dying industries.

31. Journal of Business
30
We have also examined the relationship between q and two frequently used measures of monopoly power-the Lerner index and the
four-firm concentration ratio. We found that while the Lerner index
contributed toward explaining q, the concentration ratio seemed to
have little significance. We must stress at this point that all these
results are subject to the usual caveats concerning data availability and
quality, and improvements in these areas would greatly aid future
research.
Appendix
It is useful to examine the impactof technical progressand its relationshipto
marketvalue and replacementcost. Initially,let us definereplacementcost as
the capitalexpenditurenecessary to producethe identicalproductline with the
most efficient technology.
To be explicit, let Ktbe the current,time t, cost of a machinewhichproduces
one unitof the productin a perpetualflow. Suppose, also, thatCt is the variable
cost streamof the machineand letpt be the currentproductprice. We consider
machinesin a putty-clayformat;once installed,unit operatingcosts are fixed.
In a competitive marketfor new capital goods, we must have market value
Mt=
(pT 00
=
- r(T-t)d
r
-
-Pt
dr
Ct)e
(AI)
Ct/r
CtIr
=Kt,
or qt = MtlKt = 1. If the cost streams, {Ct} and {Kt}, are specified, then the
productprice will adjust throughthe supply curve to bringabout the equilibrium. In particular,with Kt and Ctlr fallingover time, discountedprices must
fall as well. (Since Kt + Ctlr > 0, eventuallypt must fall at a decreasingrate.)
Whathappensto the q value of vintageequipment?Considera machinebuilt
at time s as viewed at time t. Its market value is given by
sMt =
(PT -
= Pt -
(A2)
Cs)e-r(T-t)d
CsIr.
By definition, replacementcost is the cost of the most efficient technology,
hence sRt = Kt. It follows that
sqt
=
Ct/r)/Kt
(A3)
Cs/r)/Kt
sMtlsRt = (Pt-
< (Pt -
=
tlKt = qt =
1
since operatingexpenses are falling.In other words, when we are not replacing
old equipment,with inefficientoperatingcharacteristics,then q, as we would
expect, is less than unity.

32. Tobin's q Ratio and Industrial Organization
31
Notice, though, that if technical progress is capital augmentingand there is
no improvementin operatingcosts, then Cs = Ct; 8Mt = Mt and sqt = sMtlKt =
MtlKt = qt = 1. It is tempting to fall into a trap suggested by the following
conundrum.Suppose thattechnicalprogressoccurs as variablecost reductions
and new machine costs are actually the same as replacement costs of old
machines. It is not now possible for the measuredq for old equipmentto be
lower than its true value?The answer, as we have seen, is clear. As long as the
new machineis economicallymore efficient, it shouldreplacethe old machine.
Thus the ratioof the old machine'smarketvalue to the new replacementcost is
the trueq. If new machineshave a lower operatingcost, then resultingproduct
prices bring currentq to unity and measuredq will be correct.
Technicalprogresswhich reduces operatingcosts, which are not expressible
as capital augmenting,will bias q downward.Keep in mind, though, that the
division of technical progress in this fashion is somewhat arbitraryand if the
productionstructurepermitstechnicalprogressto be put in a capitalaugmenting form, q will be forced to unity for competitive firms.
An alternativedefinitionof replacementcost has the virtue of maintaining
the equalityof competitiveq with unity. Let us define replacementcost as the
cost of acquiringthe same profitstreamwith the most efficient,that is, the cost
minimizing,technologyfor producingthe same productline. Under this definition, with syt units of new capital,we can duplicatethe profitstreamof vintage
capital, where
sYtmt = sMt
(A4)
the
Superscripting alternativedefinitionby a prime, we have
sqt = sMtlsytMt = MtlKt = qt = 1.
(A5)
Hence, as long as the productline is produced,q' = 1 for competitivefirms.Of
course, q can exceed unityby monopolyand/orfactorrentsfor noncompetitive
firms.
The alternativedefinitionof replacementcost is more suitable for our purposes than the originalone, but direct data on it is not readilyavailable.At any
rate, our proceduresare based on accountingdata on dollar investmentflows
and assume exponential technical progress. Insofar as yt declines geometrically, the cross-sectional results should be somewhat immuneto these problems. Furthermore,our results on cross-sectional comparisons of q will be
robust to the extent that there is not too much cross-firmvariation in the
relative proportionof capital and variable cost technical progress. Since all
firms respond to the same factor price patterns, the endogeneity of technical
progress lends some a priori supportto this view.
The second definitionis also superiorto the originalone because of a more
serious flaw. The choice of an efficient capital stock may not be unique. In
particular, there could be a family of efficient choices, those with lower
operating costs having higher initial costs. This makes the first definition
somewhat arbitrary.The alternativedefinition,though, gives a unique value
to replacement cost. However, in the context of our paper, with technical
progress assumed to be capital augmenting,our first definition will suffice.
The discussion in this Appendixis intendedto clarifyalternativeapproachesto
this issue.

33. 32
Journal of Business
References
ArthurAnderson& Co. 1977. Disclosure of Replacement Cost Data: Illustrations and
Analysis, May. New York: ArthurAnderson.
ArthurYoung& Co. 1977. Disclosing Replacement-Cost Data-How Companies Have
Complied with the SEC's Requirements. New York: ArthurYoung.
Ciccolo, J. A., Jr. 1975. Linkagebetween productand financialmarkets-investment
and "q." Ph.D. dissertation,Yale University.
the
accounting: SEC proposalfor replacement
Davidson,S., and Weil, R. 1975.Inflation
42-45.
cost disclosures-part I. Financial Analysts Journal 31 (September-October):
the
accounting: SEC proposalfor replacement
Davidson,S., and Weil, R. 1976.Inflation
cost disclosures-part II. Financial Analysts Journal 32 (March-April):57-66.
Falkenstein, A., and Weil, R. 1977. Replacementcost accounting:what will income
statementsbased on SEC disclosures show-part I. Financial Analysts Journal 33
46-57.
(January-February):
Falkenstein, A., and Weil, R. 1977. Replacementcost accounting:what will income
statementsbased on SEC disclosures show-Part II. Financial Analysts Journal 33
(March-April):48-56.
Leland, H. 1974. Regulationof natural monopolies and the fair rate of return.Bell
Journal of Economics 55, no. 1 (Spring:3-15.
D.C.:
of
President theUnitedStates. 1978.EconomicReport ofthePresident. Washington,
GovernmentPrintingOffice.
D.C.:
of
President theUnitedStates, 1979.Economic Report ofthe Fresident. Washington,
GovernmentPrintingOffice.
Ross, S. A., 1978. A simple approachto the valuation of risky streams. Journal of
Business 51 (July):453-75.
Scherer, F. M. 1971. Industrial Market Structure and Economic Performance. New
York: Rand McNally & Co.
Securitiesand ExchangeCommission.1976.Accounting Series Release 190 (ASR 190)
(March).Washington,D.C.: GovernmentPrintingOffice.
Sullivan, T. 1977. A note on market power and returns to stockholders.Review of
Economics and Statistics 59 (February):108-13. (b)
Sullivan, T. 1977. The cost of capital and the marketpower of firms.Review of Economics and Statistics 59 (September):209-17. (a)
Bell
S.
Thomadakis, B. 1976.A modelof marketpower, valuationandthe firm'sreturns.
Journal of Economics 17, no. 1 (Spring):150-62.
Review
and
S.
Thomadakis, B. 1977.A value basedtest of profitability marketstructure.
of Economics and Statistics 59 (May): 179-85.
approachto monetarytheory. Journal of Money,
Tobin, J. 1969.A generalequilibrium
Credit and Banking 1 (February):15-29.
Southmechanism.
policies andthe economy:the transmission
Tobin,J. 1978.Monetary
ern Economic Journal 37 (April):421-31.
Tobin, J., and Brainard,W. 1968. Pitfalls in financialmodel building.American Economic Review 58 (May): 99-122.
Tobin, J., and Brainard,W. 1977.Asset marketsand the cost of capital. In B. Belassa
and R. Nelson (eds.), Economic Progress Private Values and Public Policies: Essays
North-Holland.
in Honor of William Fellner. Amsterdam:
U.S. Departmentof Commerce. 1972. Census of Manufacturers. Washington,D.C.:
GovernmentPrintingOffice.
G.
von Furstenberg, 1977. Corporateinvestment:does marketvaluationreally matter?
Brookings Papers on Economic Activity, no. 2, pp. 347-97.