Over the next couple of weeks I will consider ideas from a paper coming out in Marketing Science. [This post was written in 2018]. I wrote the paper with a former PhD student, Moeen Butt. This looks at the use of a metric called Tobin’s q. This has been used in papers claiming to be proving the value of marketing.
Managers Don’t Use Tobin’s Q
I have never found a manager who has used this metric for anything. It is especially unfortunate, therefore, that it is (was?) all the rage amongst marketing academics. Moeen and I found that over the past few years [looking backwards from 2018] there have been a large number of papers using Tobin’s q as a performance metric.
The basic idea behind Tobin’s q is interesting. It compares market value to the replacement cost of assets to show when markets think assets are being used well or badly. (Of course, life is more complicated than that, you have to adjust for debt etc… but let us keep it simple).
The problem is that the replacement cost of assets is unknown. This means scholars have hit upon the idea of using the book value of assets recorded in the financial accounts when judging Tobin’s q for firms. This probably seemed like a good idea. Indeed, it makes practical Tobin’s original notion which was pretty theoretical. Still, using book value causes immense problems. Basically, the figures recorded in financial accounts have a plethora of biases. (More on these here).
Proving The Value Of Marketing With Tobin’s Q?
Scholars have decided to use these biased Tobin’s q measures as ways to track performance. Indeed, at its most ambitious this activity was described as building marketing’s credibility. Proving the value of marketing.
The problem is that I’m not sure who this is supposed to build credibility with. I repeat, I have never found a manager who uses this metric. So, the basic idea — a paper that shows marketing raises Tobin’s q — is unlikely to convince anyone who doesn’t recognize Tobin’s q as a valuable metric. We make this point in the article, AATQ being Accounting-based Approximations of Tobin’s q:
Marketing accountability research aims to examine marketing’s value; yet much of the research focuses on how marketing impacts AATQ, metrics that managers do not consider important. Attempts to build marketing’s credibility cannot be based on metrics that managers do not use and are biased towards finding marketing’s effectiveness. Researchers should use metrics that are meaningful to non-researchers or, at a minimum, argue in detail why the metrics should be meaningful to non-researchers.
Bendle and Butt, 2018, page 34
That last point is critical. Managers aren’t always correct in their use of metrics but academics need to use managerially recognized metrics if they want to communicate with managers.
For more on Tobin’s q and Total q see here, here, here and here.
Read: Neil Bendle and Moeen Butt (2018), The Misuse of Accounting-Based Approximations of Tobin’s q in a World of Market-Based Assets, Marketing Science, 37 (3) pages 484-504
A slightly earlier version of our paper is here for those who don’t subscribe to Marketing Science:The Misuse of Tobin’s q Submitted Jan 2018 v2