Objective - This study revisits Tobin's q by offering a theoretically derived empirical model based on the Ohlson framework, aiming to correct the misapplications found in existing literature.

Methodology/Technique - While Tobin's q has been extensively used as a measure of firm value, the traditional empirical models often assume a linear relationship with variables such as growth, leverage, and profitability.

Finding - This paper demonstrates that even in a basic model, such as the Gordon growth model, this linearity does not hold. In fact, this paper shows that a linear relationship will hold only under restricted conditions and only with certain explanatory variables.

Novelty - By introducing a theoretically sound equation for Tobin's q, this study highlights the limitations of current empirical methods and provides a new perspective for firm valuation research. The results contribute significantly to improving the accuracy of business valuation models, particularly in settings with varying capital structures and market dynamics.

Type of Paper - Empirical

Keywords: Tobin's q; Ohlson model; Firm value; Valuation

JEL Classification: G12, G19.

URI: http://gatrenterprise.com/GATRJournals/GJBSSR/vol12.3_3.html

DOI: https://doi.org/10.35609/gjbssr.2024.12.3(3)

Pages 125–133