James Tobin's q ratio as an evaluation method of mergers and acquisitions

Abstract

Scope of Study: This study investigates James Tobin's q ratio as a possible method of evaluating mergers and acquisitions. Previous literature on merger objectivity and evaluation methods are reviewed and their relevancy to this study is discussed. Using data from Standard and Poor's Compustat tapes and the Financial Accounting Standards Board's tapes, q was calculated for recently acquired firms, acquiring firms, and randomly selected firms. Three hypotheses were set forth and conclusions were drawn upon those hypotheses based upon this study.

Findings of the Study: The q ratios of acquired firms in this study were substantially less than those of randomly selected firms and the acquiring firms. No evidence was provided that acquiring firms have higher q's than the random firms. Conclusions indicated that q may be considered as a viable element in merger evaluation.