A Modified Version of the Lewellen and Badrinath Measure of Tobin's Q

Abstract

Lewellen and Badrinath (1997) propose a superior method of measuring Tobin's Q. Unfortunately, their method is prone to a high percentage of missing observations and results in selecting samples of larger and more mature firms with lower Q statistics. We propose a slight modification that preserves the appeal of their method, yet almost doubles the sample size, avoids sampling problems, and is statistically indistinguishable from their Q measure. In addition, we clarify a step in the Lewellen and Badrinath Q calculation, which was inadvertently omitted in their explanation, and, if left undone, can result in downward-biased measures of Q.