If firms purchase capital up to the point where there is no further marginal benefit,and the firms’securities are equal in value to the capital,then the market value of securities measures thequantity of capital.I explore the implications of this hypothesis using data from U.S.non-farm,non-financial corporations over the past 50 years.The hypothesis implies that corporations have formedlarge amounts of intangible capital,especially in the past decade.The resources for expanding capitalhave come from the output of the existing capital.An endogenous growth model can explain thebasic facts about corporate performance,with only a modest increase in the productivity of capitalin the 1990s.
A basic first-order condition holds that firms invest in produced capital to the point that its discounted return is equal to its production cost.How effectiveare firms in satisfying this condition?The endogenous investment hypothesisconsidered in this paper holds that the condition applies as a workableapproximation,if not from year to year,at least over longer periods.Under thereasonable assumption that the securities issued by a firm are claims on its capitaland therefore have a total value equal to the value of the capital,the observedvalue of the securities reveals the quantity of capital.The endogenous investmenthypothesis implies that securities markets provide a way to measure intangiblecapital accumulated by the corporate sector,where both the flow of investmentand the stock of capital are not directly observed.There are good reasons tobelieve that otherwise unmeasureable intangible capital is an important part of thecapital of a modern economy.