Q and the tax bias theory : The role of depreciation tax shields

Abstract

A growing body of literature analyzes the variation in Q, the ratio of financial market value to asset current replacement cost, and makes inferences about attributes such as monopoly power, profitability, managerial performance, etc. These studies ignore potential biases embedded in Q that result from non-neutral tax policies. This study examines the association between Q and tax biases and establishes that differences in accumulated depreciation tax shields explain significant variation in Q. The implication that Q should be adjusted for tax biases before use in empirical research is examined further. Adjusting Q for tax biases, at least with the factors herein, leads only to minor changes in econometric analyses.