Doug Laney

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Doug Laney
VP Research, Business Analytics and Performance Management
1 years at Gartner
25 years IT industry

Doug Laney is a research vice president for Gartner Research, where he covers business analytics solutions and projects, information asset valuation and management, "big data" strategy, and data-governance-related issues. ...Read Full Bio

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

by Doug Laney  |  August 15, 2012  |  4 Comments

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)

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4 Comments »

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4 responses so far ↓

  • 1 Mary Adams   August 22, 2012 at 1:32 pm

    Doug – Intangibles include all kinds of knowledge–knowledge in data and information but also in processes, networks, brands and human capital. This 80% of value that is considered intangible was built through steady investment over decades in all these forms of knowledge.

    It’s important to understand how each of these pieces works. As you know, I also think it’s important to understand how they all work together. That’s the real key to linking intangibles and market value.

  • 2 Doug Laney   August 25, 2012 at 5:03 pm

    Thanks Mary. I make the point though that human capital has actually decreased relative to corporate value. It has been replaced with information-fueled process innovation and automation. And I argue that tacit (uncoded) knowledge and processes are probably steady as well, perhaps even decreasing now that we have ways to capture and record them as actual information. Brand probably is (or should be considered) a decreasing influence on value now that products and services can be searched, compared and purchased online and globally by savvy shoppers. As for networks (i.e. relationships) and human capital, we really can’t consider those formal assets because they are not “owned and controlled” or “convertible into cash” per the definition of an asset. In fact the ownership and direct monetization of employees (human capital) in particular is hampered by a little document called the Emancipation Proclamation…and the 13th Amendment to the US Constitution. :-) This leaves information, along with recognized IP as contributing to this corporate value gap. -Doug

  • 3 Brian Gentile   August 31, 2012 at 10:23 pm

    Doug,

    Really terrific article. Good comment by Mary, too.

    I’d been looking for some evidence of the rise in corporate value from more advanced uses of time and information. In this argument, using Tobin’s q as a proxy for tangible asset (replacement) value versus firm market value is both clever and useful. My interest is to cite examples of valuable companies who successfully compete based on their effective use of time and information, an information technology phenomenon I refer to as harnessing “data-driven applications”. Ultimately, the firm’s market value should reflect this increased level of competitiveness.

    I hope that you won’t mind me borrowing some of your charts and referencing your article as I build out some content (presentation material and probably a new blog post) to extend my Forbes article on “The New Factors of Production and the Rise of Data-Driven Applications”: http://onforb.es/sAlZeF.

    Thanks,

    Brian Gentile
    Chief Executive Officer
    Jaspersoft

  • 4 Doug Laney   September 1, 2012 at 5:32 pm

    Thanks much Brian. Happy to have you cite this. As a follow-up test I examined the Tobin’s q of actual \infocentric\ companies (i.e. those that met our criteria for explicitly being serious about collecting, managing and leveraging information assets) versus the market norm. Preliminary results show that such companies warrant a 300% valuation premium. Published research is forthcoming. But certainly can discuss details with you.