Economists have misunderstood a key indicator—and it’s a big problem, says researcher –

by | Jan 26, 2023 | Financial

In studies, forecasts and recommendations to governments, markets are seen as capable of processing so-called rational information. Economists claim that firms’ market prices result from rational expectation about their future monetary flows and intangible assets not accounted by bookkeeping, which, however, would enable those future monetary flows to occur.

It is quite difficult to find evidence corroborating these assertions. They rely on information about the future, which is unknown and, thus, cannot be tested at the time of the analysis.
Albeit the lack of evidence, many economists count on Tobin’s q, an indicator based on market values. While book value reflects the value of a company according to its financial statements (its books), market value is the value of a company according to the financial markets. A high q value is interpreted as meaning that the firm has many growth opportunities. A low q is interpreted as the opposite.
What is Tobin’s q
I recently published a study that shows that these associations for the variable Tobin’s q can rather be explained …

Article Attribution | Read More at Article Source

Share This