Tobin's Q is the most common measurement of firm value and performance. However, estimating Tobin's Q accurately is not easy. Researchers have used book values of debts or assets rather than the market values. We estimate Tobin's Q for listed firms in Korea from 1980 to 2005 based on replacement costs of assets as well as market values of debts and common and preferred stocks. We compare the estimates using the modified annual average depreciation rates and economic depreciation rates. In sum, we present and compare four alternative series of Tobin's Q measures. We then estimate investment functions with alternative Tobin's Q values as regressors to compare the reliability of alternative estimates. We find that the simple measure of using book values of both debts and assets is the most unreliable.Keywords: Tobin's Q, Firm value, Replacement costs, Investment function, Korean firms, Business groupsJEL Classification: E22, L25, G34(ProQuest: ... denotes formulae omitted.)I. IntroductionFirm value (hereafter FV) calibrates the efficiency of signaling a firm's performance in the market, forecasts expected yields of investments, and assesses the realized efficiency of investments. Accordingly, scholars have improved the methodological precision in their estimates of FV. Currently, Tobin's Q ratio (aka Tobin's Q) (1969) is the most widely adopted measurement. This ratio constructs FV by using the ratio of market values of liabilities and stock to replacement costs of assets. The market value of a firm's assets is obtained from the sum of the market values of stock and liabilities. Replacement costs represent the amount it would cost to replace an asset at its current price.However, calculating Tobin's Q accurately is not easy. The market values of stock and liabilities are difficult to estimate. Estimating replacement costs also requires consideration of various factors related to different types of assets, which complicates the computation. Therefore, many researchers tend to use book values rather than market values of liabilities and assets.In several empirical studies, Tobin's Q has been adopted as a key independent or dependent variable (Morck et al. 1988; Lang and Stultz 1994; Baek et al. 2004; Kang et al. 2006; Kim 2009). However, because of the difficulty in computation, the ratio is frequently replaced by the market-to-book (M/B) ratio. This ratio is a simple method that divides the sum of market capitalization at year-end and the book value of liabilities by the book value of assets (Black et al. 2003; Drobetz et al. 2004; Yoon et al. 2005; Bae et al. 2008). Alternatively, Tobin's Q has been partially estimated, for example, by using either the market value of liabilities or the replacement costs of assets (Kang et al. 2004). However, even the partial estimation of Tobin's Q tends to be done only for specific periods. Despite its theoretical and empirical importance, very little attempt is done to estimate Tobin's Q over a long-term period, particularly in Korea. Given the limitations of this stream of research, this study aims to estimate an accurate Tobin's Q of Korean listed firms in the longest period possible.Our estimation method follows Lindenberg and Ross (1981) and Hoshi and Kashyap (1990), who further developed the methodology of Tobin (1969). We compare existing methods and the differences in estimation results. We also make several important improvements, such as in the estimation of values of preferred stocks and replacement costs of assets. We estimate the values of preferred stocks following Lindenberg and Ross (1981) and Summers (1981), and divide average dividends by average dividend ratio. This method is better than others because prices of preferred stocks are not easily available due to less frequent transactions.Improvement in the estimation of the replacement costs of assets hinges on the method of calculating depreciation rates. Hong et al. …