Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/121862
Authors: 
Franke, Rainer
Yanovski, Boyan
Year of Publication: 
2015
Series/Report no.: 
FinMaP-Working Paper 49
Abstract: 
This note considers Tobin's average Q in a framework where firms finance investment by equities and debt. The determination of its long-run equilibrium value Qo is based on positing equality of the loan rate and, adjusted for a risk premium, the return on equities. Qo can thus be characterized as a ratio of two rates representing the somewhat modified interest costs and profits of the firms. The familiar benchmark value Qo=1 obtains if another condition on the risk premium holds true, which may or may not be the case. An elementary numerical check demonstrates that possible deviations of Qo from unity are not overly dramatic.
Subjects: 
Tobin's average Q
debt and equity financing
no-arbitrage condition
fundamentalist traders
JEL: 
C02
D84
E12
E30
Document Type: 
Working Paper
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