Market value of assets divided by their replacement cost is Tobin’s q, also called the q ratio. It compares what assets are worth in financial markets with what it would cost to replace them.
Economists use q to connect asset valuation with investment decisions. A value above 1 suggests that the market values a firm’s capital more highly than its replacement cost, potentially encouraging new investment. A value below 1 suggests that market value is lower than replacement cost.
The idea predates the name. Robin Marris introduced a related firm-level valuation ratio in 1964, while Nicholas Kaldor used a macroeconomic version in 1966. James Tobin popularized the concept in 1970, and his name became attached to it.
In practice, replacement values are difficult to estimate, so researchers often approximate q using market equity plus liabilities divided by the corresponding book values. That measure is not identical to the market-to-book or price-to-book ratio, which generally compares equity market value only with equity book value. Intangible assets, speculation and market expectations can also push q away from 1.