We have developed Tobin's marginal q-theory of investment in this section.

It is shown in an intermezzo to this chapter that, provided some more specific assumptions are made about the adjustment cost function, Tobin's average q-theory coincides with his marginal q-theory. Average q for the firm is defined as 4(0) V(0)/K(0). In words, 7/ represents the value that the stock market ascribes to each unit of installed capital of the firm (at replacement cost, see the Intermezzo).

And this is exactly where the great beauty of the theory lies. In principle one can look up the stock market value of a firm from the financial pages in the newspapers, and divide this by the replacement value of its capital stock (slightly more work), and calculate the firm's q. The value of q that is obtained in this manner reflects all information that is (according to the stock market participants) of relevance to the particular firm (see Hayashi (1982) for further remarks).