Tobin’s Q & A: Evidence of Information’s Real Market Value

First posted in the Gartner Blog Network

Tobin’s q is a simple ratio first posited by Nobel-winning American economist James Tobin in the 1960s to understand the relationship between a company’s market value and the replacement value of its assets. Analysis shows that this quotient has been growing since financial statements were standardized following the Great Depression. Smoothing economic boom and bust cycles via linear regression, Tobin’s q has more than doubled from 0.4 in 1945 to a predicted 1.1 in any given year currently.

This means that in general markets now value companies more than the sum of their tangible assets. How can this be?  Non-reportable intangible assets of course.

We know that due to 75 year old accounting standards, certain intangibles cannot be valued and reported.  These unreportable intangibles frequently cited include human capital and intellectual capital. Yet, could these alone have doubled over seven decades? Do corporations of similar revenue have twice the number of employees they once did? No, quite the opposite as we’ve become more efficient and reliant on technology. Do humans have twice the knowledge capacity than we did back in the day?  Not only my teenager would fervently disagree with that.

Then what is it that companies have so much more of, has been accumulating for over half a decade, and that is hidden from balance sheets?

Information.

Ever since Arthur Andersen computerized a GE payroll plant in 1953, companies have become better and better at amassing information assets (leading up to this age of Big Data) and finding ways to leverage them. Yet the value of information isn’t quantified or reported in any way. Even today’s infocentric companies whose business models revolve around collecting, buying and selling data (e.g. Facebook, Google, Experian, Nielsen, etc.) have balance sheets devoid of their most valuable asset.

Furthermore, a study by intellectual capital research firm, Ocean Tomo, shows that the portion of corporate market value attributable to intangibles has grown from 17% in 1975 to a whopping 81% in 2010. Indeed, information accumulation has not only increased dramatically in businesses, but the importance of information itself has supplanted traditional assets in generating revenue, and therefore in contributing to market value as well.

So what are CEOs to do knowing that information comprises a majority of their corporate value?  First, forget what the accountants say, and listen to what the market is saying. Stop just talking about information as such an important asset and start valuing and managing it like one.

For further reading on the topic of infonomics:

To Facebook You’re Worth $80.95 (Wall Street Journal)
Infonomics-The Practice of Information Economics (Forbes)
Extracting Value from Information (Financial Times, free registration)
Introducing Infonomics (Gartner, client access)
Infonomics(Wikipedia)
Follow me on Twitter @doug_laney
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