Measuring Marginal q

Using asset prices I estimate the marginal value of capital in a dynamic stochastic economy under general assumptions about technology and preferences. The state-space measure of marginal q relies on the joint measurability of the value function, i.e. firm market value, and its underlying firm state variables. Unlike existing methodologies, the state-space marginal q requires only general restrictions on the stochastic discount factor and the firm investment technology, and it uses simple linear estimation methods. Consistently with a large class of neoclassical investment models, I construct the state-space marginal q using the firm capital stock and profitability shocks. I show that this new measure of real investment opportunities is substantially different from the conventional Tobin's Q, it yields more plausible and robust estimates of capital adjustment costs, it increases the correlation with investment and the sensitivity of investment to fundamentals.