Revisiting Tobin's Q: Integrating Intangible Capital into the Neoclassical Framework

Abstract: This paper seeks to replicate and extend the seminal work of Peters and Taylor (2017) on the relationship between intangible capital and the investment q ratios. Our study spans 1975 to 2021, investigating dynamics in firms' physical and intangible investments. We examine data from 1975 to 2021. Our analysis reveals significant variability in both intangible and physical capital among the sampled firms. Due to measurement errors affecting the reliability of slopes, we rely on the R-squared (R²) statistic as our primary analytical tool. We highlight the superior reliability and stability of total q compared to the conventional q ratio, with total q, which includes intangible capital, substantially enhancing the explanatory power (R²) when assessing various investment metrics. As such, we observe a substantial increase in R² values when transitioning from physical to intangible investment, further underscoring the importance of intangible assets in firms' capital allocation strategies. Across all industries and examined time periods, our findings consistently demonstrate the superiority of total q, enhancing its utility for assessing investment opportunities. Overall, our research underscores the growing importance of intangible assets in firms' capital allocation strategies.