We demonstrate that the conventional practice of running firm investment regressions on beginning-of-period average Q cannot recover structural parameters related to adjustment costs. We propose two new methods of estimating these structural parameters by using financial market information...

This paper studies the responsiveness of firm investment to shocks in the input factor and output prices (the market conditions) by using stock market information on excess returns. The 'q' theory of investment is modified to allow for heterogeneous capital, ex post inflexible technology, and...