The Tobin coefficient is the ratio between a physical asset of market value and its replacement amount. It was first introduced by Nicholas Caldor in 1966 in his article “Marginal Productivity and Macroeconomic Distribution Theories: Commentary on Samuelson and Modigliani”. It was popularized a decade later, however by James Tobin, who describes its two magnitudes.
One of them, the numerator, is market valuation: the current value in the market for the exchange of existing assets. Another, the denominator, is the price of substitution or reproduction, that is, market value for newly manufactured goods. He believes that this ratio has significant macroeconomic importance and usefulness as a link between financial markets, as well as individual goods and services.
One company
Although this is not a direct equivalent of the Tobin coefficient, it has become common practice in financial literature to calculate this ratio by comparing the market value of capital and liabilities of enterprises with its corresponding book value, since the replacement amount of the company's assets is difficult to evaluate:
Common practice assumes equivalence of production obligations. This gives the following expression:
It is worth paying attention: even if it is assumed that the market and book value of liabilities are equal, this is not equal to the “Bazaar coefficient” or the “Ratio of the price to the average” used in the financial analysis. This analysis is calculated only for capital values:
The Tobin coefficient also often uses the inverse of this ratio. And more specifically, it looks like this:
For listed companies, the market value of shares (capitalization) is often indicated in financial databases. This can be calculated for a specific point in time.
Total corporations
Another use for the Tobin coefficient is to determine the valuation of the entire market in relation to total corporate assets. The formula for this is:
The following chart is an example for all organizations. The line shows the ratio of the market value of shares to net assets at the replacement price since 1900.
application
If the market value reflects only the registered assets of the company, the Tobin coefficient q will be 1.0. This suggests that market value reflects some unmeasured or unregistered assets of the company. High values according to the Tobin coefficient formula encourage organizations to invest more in capital, because they “cost” higher than the price they paid for.
If the value of the company's shares is $ 2, and the capital in the current market is 1, the organization can issue securities and invest the proceeds. In this case, q> 1. The Tobin coefficient is a ratio, therefore, on the other hand, if it is less than 1, the market value will be lower than the recorded amount of assets. This suggests that he may underestimate the company.
A low Q factor for the entire market does not mean that a complete redistribution of resources in the economy will create value. Instead, when the market Q is less than parity, investors are too pessimistic about future asset returns.
Rational implementation
Lang and Shtulz found that the Tobin coefficient characterizes a lower Q factor in diversified companies than in oriented firms, because the market reduces the value of assets.
Tobin's discoveries show that stock price changes will be reflected in modification, consumption, and investment, although empirical evidence suggests that its introduction is not as tough as you might think. This is largely due to the fact that firms do not blindly base decisions on fixed investments on changes in share prices. Rather, they study future interest rates and the present value of expected profits.
Methods for assessing intellectual capital, Tobin coefficient
It measures two variables: the current value of fixed assets, calculated by accountants or statisticians, and the market value of capital, bonds. But there are other elements that can affect, namely, the hype in the market and speculation, reflecting, for example, the views of analysts on the prospects of companies. An important role is played by the intellectual capital of corporations, that is, the immeasurable contribution of knowledge, technology and other intangible assets that a company may have, but they are not taken into account by accountants. Some organizations seek to develop ways to measure intangible assets, including intellectual capital.
It is believed that Tobin’s q theory is affected by market hype and intangible assets, so fluctuations around the value of 1 can be seen.
Caldor and its definition
In his 1966 paper, Marginal Productivity and Macroeconomic Distribution Theory: A Comment by Samuelson and Modigliani, Nicholas presented this relationship as part of his broader theory. In an article, Caldor writes: "The valuation coefficient is the ratio of the market value of shares to the capital used by corporations." Then, the author continues to investigate the q properties of Tobin's investment theory at the proper macroeconomic level. As a result, he derives the following equation:
Where c is net consumption from capital;
sw - employee savings;
g is the growth rate;
Y is income;
k is capital;
sc - capital savings;
i - the proportion of new securities issued by firms.
Caldor then complements this with the stock price equation p:
Own interpretation
Taking into account the coefficients of savings and capital gains, there will be a certain estimate that will ensure sufficient volume on the part of the personal sector to place new securities issued by corporations. Thus, the network of finances will depend not only on the propensities of individuals to save, but also on the policies of corporations in relation to new problems.
In the absence of fresh issues, the level of value for securities will be established at the moment when the purchases of foreign currency by investors are balanced by the sale, as a result of which the personal savings of the personal sector will become equal to zero. The issuance of new shares by corporations will result in lower prices (that is, a valuation coefficient v) so that sales will decrease sufficiently to stimulate the net savings needed to accept new issues. If it were negative and corporations were considered net purchasers of securities from the personal sector, then the rating coefficient v would be brought to such an extent that net savings acted as negative, exceeding the amount necessary to match sales.
Caldor clearly establishes an equilibrium condition under which, ceteris paribus, mutual obligations, the stock of savings existing at any given time is compared with the total number of securities in circulation on the market. He goes on to say: "In a Golden Age equilibrium state (given g and K / Y, however defined), v will be constant with a value that can be> <1, depending on the meanings of sc, sw, c" . In this sentence, Caldor sets out the definition of the ratio v in equilibrium (constant g and K / Y) for capital and employee savings, as well as for net consumption outside and the issuance of new shares by firms.
The mistake of capitalism
Finally, Caldor is considering whether this exercise gives a hint of the future development of income distribution in the system. Neoclassicists tended to argue that capitalism ultimately eliminates society and leads to a more uniform distribution of income. Caldor poses a case by which it may be within its framework.
Does this “neo-pasinetti theorem” have any very long-term solution? So far, no one has taken into account the changes in the distribution of assets between the “workers” (that is, pension funds) and the “capitalists” - many really assumed that it would be permanent. However, since they sell shares (if c> 0), and pension funds buy them, it can be assumed that the share of total assets in the hands of the former will constantly decrease, while part in the hands of workers will continuously increase until in some the capitalists will have no shares left. Pension funds and insurance companies will own them all.
Another look
Although this is a possible interpretation of the analysis, Caldor warns against it and sets out an alternative possibility: "This view ignores the fact that the ranks of the capitalist class are constantly being updated by the sons and daughters of new industry leaders, replacing the grandchildren and granddaughters of senior captains who are gradually dispersing their inheritance, living behind limits of maximum dividend income.
It is reasonable to assume that the value of shares of newly formed and growing companies rises at a faster rate than average, while the securities of older companies (which are reduced in relative importance) are growing at a slower pace. This means that the rate of increase in the value of savings in the hands of the capitalist group as a whole, for the reasons mentioned above, is greater than the rate of increase in assets in the hands of pension funds and so on. "