Tobin’s Q Does Not Measure Firm Performance: Theory, Empirics, and Alternative Measures∗

Abstract

Empirical studies in the corporate governance literature often use Tobin’s Q as a proxy for firm performance. However, our theoretical framework illustrates that the relationship between firm performance and Tobin’s Q is confounded by endogeneity. In particular, inefficiency due to underinvestment lowers firm performance but increases Tobin’s Q. We then use… (More)

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