Hypothesis that Tobin’s q captures organizations’ debt levels instead of their growth opportunities and intangible assets

Figures & data

Figure 1. Numerical examples of the mechanical effect hypothesis

Notes: This figure portrays the example in Table 1. As exhibited, Tobin’s q converges to 1 by increasing the debt leverage. When q > 1, it converges from above, and when q < 1, it converges from bellow.

Table 1. Numerical examples of the mechanical effect hypothesis*

Panel A- case where q > 1
Step
	1	2	3	4	5
Market Equity	148	148	148	148	148
Book Equity	40	40	40	40	40
Book Debt	0	8	64	512	4 096
Book Leverage	0%	17%	62%	93%	99%
Market to Book of Equity	3.70	3.7	3.7	3.7	3.7
Tobin’s q	3.70	3.25	2.04	1.20	1.03
Panel B- Case where q < 1
	1	2	3	4	5
Market Equity	75	75	75	75	75
Book Equity	100	100	100	100	100
Book Debt	0	8	64	512	4096
Book Leverage	0%	17%	62%	93%	99%
Market to Book of Equity	0.75	0.75	0.75	0.75	0.75
Tobin’s q	0.75	0.77	0.85	0.96	0.99

*Notes: In this example, Tobin’s q is computed through book debt. After step 2, book debt is simply multiplied by 8. Ceteris paribus, as debt increases, the market to book of shareholders’ equity ratio remains constant, while Tobin’s q converges to 1.

Table 2. 8 country sample obtained at the Refinitiv Eikon-Datastream Database

	Firms	Yearly observations
		Total	With q higher than 1	With q equal to 1	With q lower than 1
Canada Sample	2 980	19 886	13 482	74	6 330
China Sample	3 502	35 003	33 620	67	1 316
France Sample	1 289	12 149	8 396	59	3 694
Germany Sample	1 354	12 441	9 213	53	3 175
Italy Sample	546	4 797	3 221	12	1 564
Japan Sample	5 306	70 164	31 983	416	37 765
UK Sample	3 804	28 711	18 413	170	10 128
US Sample	13 782	109 818	85 150	478	24 190
Total	32 563	292 969	203 478	1 329	88 162
Percentage			0.69	0.00	0.30

Table 3. Computing the variables at Refinitiv Eikon-Datastream Database

Variable	Description	Data mnemonics in the database
TOBINQ	Ratio containing the market value of equity and the book value of liabilities in the numerator, and the book value of equity and liabilities (equal to the total assets) in the denominator. Thus, in Eq. (4)(4) $MBE=\frac{e_{MV}}{e_{BV}}$(4) , x and y are equal to book liabilities. This variable is the same as the q variable used in McConnell and Servaes (1995) and the Market to Book (of the firm) variable used in Rajan and Zingales (1995).	((WC03351+ WC03501*MTBV)/(WC03351+ WC03501))
MARKETTOBOOK[Equity]	Market value divided by the book value per equity shares at close date. Thus, in Eq. (2)(2) $\begin{array}{rl}& q^{proxy}=\frac{\mathrm{M}\mathrm{a}\mathrm{r}\mathrm{k}\mathrm{e}\mathrm{t}\mathrm{V}\mathrm{a}\mathrm{l}\mathrm{u}\mathrm{e}\mathrm{o}\mathrm{f}\mathrm{C}\mathrm{a}\mathrm{p}\mathrm{i}\mathrm{t}\mathrm{a}\mathrm{l}\mathrm{G}\mathrm{o}\mathrm{o}\mathrm{d}\mathrm{s}}{\mathrm{R}\mathrm{e}\mathrm{p}\mathrm{l}\mathrm{a}\mathrm{c}\mathrm{e}\mathrm{m}\mathrm{e}\mathrm{n}\mathrm{t}\mathrm{C}\mathrm{o}\mathrm{s}\mathrm{t}\mathrm{o}\mathrm{f}\mathrm{C}\mathrm{a}\mathrm{p}\mathrm{i}\mathrm{t}\mathrm{a}\mathrm{l}\mathrm{G}\mathrm{o}\mathrm{o}\mathrm{d}\mathrm{s}}\\ & \hspace{0.17em}=\frac{e_{MV}+x}{e_{BV}+y}\end{array}$(2) , x and y are equal to zero.	(MTBV)
DEBTLEVERAGE	Book value of total liabilities divided by the sum of the book values of shareholders’ equity and total liabilities. In the robustness procedures, this variable is computed by using only debt instead of liabilities.	(WC03351)/(WC03351+ WC03501)

Figure 2. Empirically comparing the mechanical effect hypothesis and the informational content of prices hypothesis Panel A: Sub sample with TOBINQ and MARKETTOBOOK[Equity] higher than 1

Figure 2. Continued.

McConnell, J., & Servaes, H. (1995). Equity ownership and the two faces of debt. Journal of Financial Economics, 39(1), 131–157. https://doi.org/10.1016/0304-405X(95)00824-X

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Rajan, R., & Zingales, L. (1995). What Do We Know about Capital Structure? Some Evidence from International Data. Journal of Finance, 50(5), 1421–1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x

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