We propose a new method to estimate the marginal value of capital under minimal assumptions. By combining asset prices with fundamentals, our method provides a quasi‐model‐free marginal q together with a simple correction for measurement error in (average) Tobin's Q using linear regressions. Marginal q yields plausible and robust estimates of adjustment costs and investment sensitivities to fundamentals. The widening gap between marginal q and Tobin's Q is driven primarily by market power and intangible capital. Our novel findings strongly support the neoclassical theory of investment and challenge the widespread use of Tobin's Q as proxy for investment opportunities.

Using a novel measure of industry exposure to government spending, we show predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies. An investment strategy that exploits the presidential cycle predictability generates abnormal returns as large as 6.9% per annum. Our results suggest market underreaction to predictable variation in the effect of government spending policies.

What are the economic determinants of a firm’s market value? We answer this question through the lens of a generalized neoclassical model of investment with quasi-fixed labor and three heterogeneous capital inputs. We estimate the structural model using firm-level data on US firms and find that, on average and depending on the industry, installed labor force accounts for 14–21% of firms’ market value, physical capital accounts for 30–40%, knowledge capital accounts for 20–43%, and brand capital accounts for 6–25%. Our analysis provides direct empirical evidence for the importance of labor and intangible capital inputs for understanding firm value.