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

Darrell E. Lee · James G. Tompkins

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Reporting and Valuation Research

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. A slight modification is proposed 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, a step in the Lewellen and Badrinath Q calculation is clarified, which was inadvertently omitted in their explanation, and, if left undone, can result in downward-biased measures of Q.

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