Tobin’s q and Airline Performances

Abstract

This article studies the performance of the global airline industry by applying Tobin’s q, a financial market-based measure of firm value, as the primary measure. With 27 airlines from Asia Pacific, Europe, and North America over the period of 1989 to 1999 we find that the industry on average is a low q ratio industry, and European carriers generally have lower q values relative to their counterparts in the other two regions. There is a general pattern of low correlation between q and other financial measures except the variable of price-to-book-value ratio, indicating that Tobin’s q captures additional dimensions of the airline performances. Applying a regression model, we find significant relationships between q and some operational variables and economic factors of the industry.

Value determinants in the aviation industry

“…As far as the choice of the dependent variable is concerned, former literature (see for instance Gupta et al, 2006) recommend the recourse to a simplified Tobin's Q as a substitute of the market to book ratio. The two variables are strongly correlated in the industry, but the Tobin's Q avoids the dropping of companies with a negative market to book ratio (see Li et al, 2004). The Tobin's Q, firstly conceived in Tobin and Brainard (1968) and Tobin (1969), is defined as the ratio between the market value of a firm (its enterprise value, EV henceforth) and the replacement cost of its assets.…”

“…In these regards, Tsai et al (2008), by making use of event-study methodology, assess how a new route announcement affects an airline's stock market value, and verify that route strategy and entry strategy contribute to the direction and magnitude of the stock market reaction. With regards to the determinants of value, Li et al (2004) analyze 27 European, American and Asian Airlines by studying their Tobin's Q over the period 1989Tobin's Q over the period -1999. First, they show that Tobin's Q is usually very low in the aviation industry, lower than 1 in most cases.…”

“…As far as the aviation industry is concerned, notwithstanding its relevance in current economies, there is a lack of former research on the topic of firm valuation. Li et al (2004), with reference to a sample of Airlines, report a weak relationship between Tobin's Q and a set of accounting variables, while the evolutionary setting and the global economic context seem to be the more significant value drivers. This paper aims to extend this analysis to both airports and airlines, widening the set of value drivers considered.…”

Aggregate and Disaggregate Measures of Operating and Non-Operating Working Capital Influence on Firm Performance: Evidence From Malaysia

“…Moreover, TQ, it has been argued, is seen as a long-term firm performance measure (Dwivedi & Jain, 2005) and is based on current information that reflects the present value of future cash flows (Ganguli & Agrawal, 2009;Wahla & Hussain, 2012). A TQ value higher than 1 would mean that the firm has created more value by using invested resources (Li et al, 2004), has better investment opportunities (Lang et al, 1989), and has a higher growth potential (Brainard & Tobin, 1968). While the value lower than 1 indicates that the firm's market value is less than the book value of the assets, which means that the market value of the firm's assets, based on investors' assessment, is less than the investment made (at cost) in the firm's assets.…”

A Critical Review of the Literature on Firm-Level Theories on Ship Investment

“…These showed that for the firm's investment opportunities and when there are no fixed costs of investment the marginal Q is a more accurate measure than average Q (Bolton et al 2011). Moreover, Q ratio, itself, applied to measure the performance of the airline industry (Li et al 2004) and proved that Q ratio captures additional dimensions of the airline performances compared to other financial measures. More recently, Skjeggedal (2012) applied Q theory into Norwegian housing from 1992 to 2011, where the value of Norwegian housing, Q, is defined as the ratio of housing prices to the construction costs of new housing and housing is defined as the aggregate housing stock in Norway's national accounts.…”