If Tobin's Q is greater than 1, what does this imply about the market's valuation?

When Tobin's Q is greater than 1, it indicates that the market values the company's assets at more than their replacement costs. Tobin's Q is a financial ratio that compares the market value of a firm's assets to the replacement cost of those assets.

A Q ratio greater than 1 suggests that investors believe the company has strong future growth prospects, and therefore, the market value assigned to the firm exceeds the cost of replacing its current assets. This implies that the company is seen as having significant earning potential, leading to a higher valuation in the eyes of investors.

In contrast, a Tobin's Q of 1 would suggest that the market values the firm's assets accurately based on replacement costs, while a Q value less than 1 would indicate that the market undervalues the firm's assets relative to their replacement costs. Thus, the correct interpretation of a Q ratio greater than 1 is that it reflects a valuation reflecting strong growth expectations, rather than merely replacing costs or predicting market corrections.