Handling Negative Tobin’s Q Values from Accounting Data

Summary

The document examines whether Tobin’s Q can be negative when calculated from company accounting data. It describes a formulation in which the numerator combines market equity value, preferred stock, and a debt measure that subtracts short-term assets from short-term liabilities before adding long-term debt. Under ordinary circumstances, the ratio should not be negative, since its components represent positive asset or financing values.

A negative result can arise mathematically if recorded short-term assets exceed short-term liabilities by enough to make the debt component negative. The response suggests checking for data problems and considering a debt adjustment that floors the short-term net liability component at zero. This is a proposed data-treatment choice, not a universal accounting rule. The note offers no empirical analysis or guidance on how the adjustment affects research results, so users should validate the source fields and justify any modification for their application.

Key ideas

• Tobin’s Q is generally expected to be nonnegative under normal accounting conditions.
• A negative calculated value can result when short-term assets make the debt component negative.
• Check unusual results for possible data errors before changing the formula.
• Flooring the short-term net liability component at zero is one suggested adjustment, not a universal rule.

Tags

# Can tobin's Q value for a firm be negative?


# Can tobin's Q value for a firm be negative?












Can Tobin's Q value for a firm be negative?

I am calculating Tobin's Q value using Compustat data for firm i and year t. I am using the formula presented in Chung and Pruitt(1994) -

Q = (Market value of equity + liquidation value of prefd stock + DEBT) / Totl Assets

where DEBT = sh term liabilities - short term assets + book value of lg term debt

## Answer by Alex C (score 3, accepted)

https://quant.stackexchange.com/a/32696

No, it is not possible for Tobin's Q to be negative in any normal situation.

Mathematically it is true that if the 'short term assets' figure is very large (because of a data error or otherwise) the numerator of the fraction could become negative.

To protect against this you might consider only the excess of short term liabilities over short term assets to be included in debt.

In other words I would take

DEBT = MAX(0,sh term liabilities-short term assets)+liq preferred+bk value long term debt

You may want to ask your accounting professor if this seems like an acceptable solution.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.