An Application of Tobin's Q in Bank Industry, Take Off-Balance-Sheet Activities into Consideration

Tobin’s q is widely used to measure a firm’s investment opportunity and the efficiency of capital usage by different industries. This paper tries to apply Tobin’s q in the bank sector which is always exempted by researchers in Tobin’s q studies because of many OBS activities held by banks. Considering most banks own a lot of off-balance-sheet activities, Tobin’s q is modified by adding those assets to the denominator and defined as a new q. Panel data regressions and subsample regressions have been tested for comparison between new q and traditional Tobin’s q. To further explore the application of Tobin’s q in the bank industry, the relationships between Tobin’s q and bank’s different indicators, such as growth rate, OBS activities expansion, and capital inflow, are studied afterwards based on data from the year 1986 to 2018. The bank industry is also highly associated with macroeconomy, hence this paper divides 1986-1999, 2009-2018 as pre- and post-financial crisis periods, the year from 2000 to 2008 is considered as an abnormal period, all the regressions are tested in those subsamples accordingly. The result shows that there is no big difference between the new q and the traditional Tobin’s q. And Tobin’s q is highly connected with different indicators in the bank industry in the pre- and post-financial crisis periods, but hard to explain during the year from 2000 to 2009.