Marginal q

Abstract

We propose a new method to estimate the marginal value of capital under minimal assumptions. Combining asset prices with fundamentals, our method provides a model-free estimate of marginal q together with a simple correction for measurement error in (average) Tobin’s Q. Our measure of marginal q yields plausible and robust estimates of adjustment costs and sensitivities of investment to fundamentals. It explains capital investment better than Tobin’s Q, and drives out cash flow. These results raise serious questions about the large body of empirical evidence that relies on Tobin’s Q to proxy for marginal q and control for investment opportunities.

Keywords: Corporate Investment, Firm Decisions, Value of Capital, Marginal q, Tobin Q

JEL Classification: D21, D22, D24, D92, E22, G31, G32