Скачать или смотреть Macroeconomics | BBE | Lesson 13 | BBE The Stock Market Theory | Tobins q Theory of Investment | DU

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This lesson discusses The Stock Market and Tobin’q or q Theory of Investment. It also explains the relation between Neo Classical Theory of Business Fixed Investment and The Stock Market and Tobin’q or q Theory of Investment. It is important for the 4th semester macroeconomics BBE students of Delhi University. It is relevant for other courses like BBA, Economics hons, for the graduation and post graduation level and for competitive exams like CUET Economics, IAS economics optional, Indian Economic Service and the NET JRF Economics aspirants.

Many economists see a link between fluctuations in investment and fluctuations in the stock market.

Stock refers to the shares in the ownership of corporations.
Stock market refers to the market in which these shares are traded.

Stock prices tend to be high when the firms have many opportunities for profitable investment, as this means higher future income for the shareholders. Thus, stock prices reflect the incentives to invest.

According to Nobel Prize winning economist James Tobin- firms base their investment decisions on the following ratio:

q= Market Value of Installed Capital / Replacement Cost of Installed Capital

This is called Tobin’s q.

If q is greater than 1 that is the stock market values installed capital more than the replacement cost. So, managers will buy more stock.
If q is less than 1, the managers will not replace capital as it wears out.

So, the advantage of q theory is that it reflects the expected future profitability of capital as well as the current profitability.

Relation between Neoclassical Model and Tobin’s q theory:

1. If Marginal Productivity of capital is greater than the cost of capital then firms are earning profit on their installed capital. This raises the market value of the firm’s stock and this represents the higher value of q.

2. If Marginal Productivity of capital is less than the cost of capital, then the firms are having loss on the installed capital and this reduces the market value of the firms’s stock and this represents the lower value of q.


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