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

Tobins Q is the most common measurement of firm value and performance. However, estimating Tobins Q accurately is not easy. Researchers have used book values of debts or assets rather than the market values. We estimate Tobins 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 Tobins Q measures. We then estimate investment functions with alternative Tobins 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.