52 Pages Posted: 7 Apr 2020 Last revised: 8 Aug 2022
Date Written: August 3, 2022
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
Suggested Citation: Suggested Citation