The Misuse of Tobin's q

In recent years, scholars have addressed the most important topics in corporate law based on a flawed assumption: that the ratio of the market value of a corporation's securities to their book value is a valid measure of the value of the corporation. The topics have included staggered boards, incorporation in Delaware, shareholder activism, dual-class share structures, share ownership, board diversity, and other significant aspects of corporate governance. We trace the history of this flawed assumption, and document how it emerged from Tobin's q, a concept from an unrelated area in macroeconomics. We show that scholars have misused Tobin's q, and we demonstrate empirically why scholarly assumptions about this ratio are flawed, particularly because book value is error prone, which generates problems involving aggregated assets, omitted variables, and statistical bias. Our message for corporate law scholars is straightforward: view with suspicion the large body of empirical law and finance scholarship that misuses Tobin's q. We also offer a cautionary tale for researchers more broadly: the current replication crisis in the social sciences is potentially even more serious than has been imagined, and there are critical questions about not only replicability, but also about validity.