Analyzing the relationship between Tobin’s Q and stock performance of selected U.S. firms

Abstract

The aim of this study is to analyze the dynamic impact of changes in Tobin’s Q on stock prices for a selected group of 249 publicly traded U.S. companies across various industries. To achieve this, panel unit root tests and cointegration tests are conducted, followed by estimations using DOLS and GMM models. The study utilizes annual data spanning from 2004 to 2012 for the chosen companies. Results from the panel unit root tests indicate mixed evidence regarding the non-stationarity of both variables, while cointegration between them is clearly observed. The negative coefficient of the error-correction term suggests a slow adjustment toward long-run equilibrium. Additionally, the findings highlight short-run positive feedback interactions between the variables. Both DOLS and GMM estimations consistently indicate stock overvaluation, as reflected in the upward shift of Tobin’s Q beyond the typical 0-to-1 range. For much of the sample period, the U.S. stock market experienced a downturn, largely influenced by heightened economic uncertainties during and after the Great Recession. Enhancing Tobin’s Q could contribute to increasing stock prices, though this effect is more evident in the long run, whereas short-term dynamics show mutual reinforcement. This study addresses a relatively underexplored topic, applying advanced econometric techniques using panel data. The insights derived from the results add valuable contributions to the existing literature.

Keywords: Tobin’s Q, Stock Performance, Panel Cointegration, Panel ECM, GMM, DOLS.