Tobin’s q ratio employs a fundamental principle that enterprise values cannot deviate
excessively from, namely the replacement value of the assets required to generate the
future cashflow of the business. This ratio formed the cornerstone of this research that
investigated whether an index based on the ratio would indicate time periods of market
missed valuations; determined whether the q effect exists and the probability of its
persistence over a 24 year period across different ranked quintile portfolios. Finally the
research examined a new supply approach valuation technique that altered the q ratio, and
could improve the spread in the q effect to improve investment yields.
The Tobin’s q index was compiled using the most recent estimate and the index included
the top 160 shares by market capitalisation, excluding the resources and financial sector for
firms listed from 1990, to create a representative index for the Johannesburg Stock
Exchange. Tobin’s q long term average was 1,83 at December 2013, indicating a consistent
upward bias mainly due to share valuations.
A time serious approach was followed to compare cumulative returns between different
ranked quintile portfolios, ranked by Tobin’s q to analyse for style effects. Tobin’s q
displayed style characteristics, although it was not as prominent as other value indicators.
The adjustment from the supply approach could not improve investment yields.