Accounting for Value

What are the determinants of firms' market value? We incorporate quasi-fixed labor and intangible capital inputs into the neoclassical model of investment, and estimate the contribution of each input for explaining firms' market value. Using the generalized method of moments, we estimate that, on average, physical capital accounts for 55% of firms value, installed labor force accounts for 20%, and installed intangible capital accounts for the remaining 25%. What explains these empirical findings? In contrast to conventional wisdom, we show that labor inputs are costly to adjust: we estimate that, on average, total labor adjustment costs represent about 4% of firms' annual sales, about half the value that we estimate for physical capital. In addition, total intangible capital adjustment costs represent about 2% of firms' annual sales. Thus the three capital inputs are costly to adjust which explains why the market assigns a large and positive value to the installed stocks of the different capital inputs. We also characterize the time-series and business cycle of properties of the market value of each capital input. We find that the value of labor is more volatile and procyclical than the value of the remaining inputs suggesting that understanding the determinants of the value of labor input is important for understanding the dynamics of firm value.