But there are critics of the Q theory. Capital equipment and struc-
tures lack a good secondary market, and hence there is no realistic way
to value much of the physical capital stock. The inability to value intel-
lectual capital is a perhaps more significant drawback. Microsoft has a
book value of about $40 billion but a market value over seven times as
large. In fact, the value of most technology firms is composed of their in-
tellectual capital.
Smithers maintains that the existence of intellectual capital should
not be used to justify any gap between the book and market values. Al-
though firms may own trademarks and patents, they do not own the en-
trepreneurs, engineers, or other employees that generate ideas. As long
as there is a competitive labor market, accounting allowances for human
factors of production must be calculated by their market values, just as
physical capital. The stock options lavished on employees during the
technology boom of the late 1990s to keep key personnel from being bid
away by other firms are an example of this.
This point is well taken, but some firms are more successful than
others at creating and maintaining productive groups of talented indi-
viduals. Often employees can create more firm value by working to-
gether than they can by working separately, and other firms may not be
able to create the same creative environment. The ability of the United
118 PART 2 Valuation, Style Investing, and Global Markets
FIGURE 7–6
Tobin’s Q = Ratio of Market Value to Replacement Cost of Capital