What is the q theory of investment? Who developed it? What is q, and what do different values of q imply? How is q related to the stock market value of a firm and its capital stock?
What will be an ideal response?
The q theory of investment captures the relationship between stock prices and firms' investment in physical capital. The theory was developed by James Tobin. Tobin's q equals capital's market value divided by its cost. When Tobin's q exceeds one, more investment should take place. When q is less than one, there should be no investment. Tobin's q is related to the stock market value of the firm via the formula q = V/(pKK), where V is the stock market value of the firm, pK is the price of capital, and K is the quantity of capital.
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