Neil Whoriskey is partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Whoriskey. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.
“If your experiment needs statistics, you ought to have done a better experiment.”
— Ernest Rutherford
Sometimes you need to get into the fundamentals to understand if your belief system is sound. In corporate governance literature of the last two decades, there is no more fundamental concept than Tobin’s Q, which legions of law professors have used as a proxy for firm value. Based on regression analyses examining variations in Tobin’s Q, they have made definitive pronouncements about any number of corporate governance topics, from staggered boards to the value of activism. Yet tracing the evolution of Tobin’s Q to its current state—a state completely alien to the original conception—reveals a twisted tale, proceeding like an epidemiological disaster in which Tobin’s Q transforms from an innocent and useful organism in macroeconomics to an unrecognizably mutated and widespread disease in corporate governance literature, infecting policies and practices throughout the corporate governance world.
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