The Bond Market's q

I propose an implementation of the q-theory of investment using bond prices instead of equity prices. Credit risk makes corporate bond prices sensitive to future asset values, and q can be inferred from bond prices. With aggregate U.S. data, the bond market's q fits the investment equation six times better than the usual measure of q, it drives out cash flows, and it reduces the implied adjustment costs by more than an order of magnitude. Theoretical interpretations for these results are discussed. (c) 2009 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..