This paper provides new evidence on the failure of the Q-theory of investment. The Q-theory implies the state-by-state equivalence of stock and investment returns—an im- portant implication of many asset pricing models. Using aggregate data, I find there exists a realistic parameterization of the aggregate production and adjustment cost function such that empirical investment returns have first and second moments similar to historical stock returns. Investment and stock returns are negatively correlated, however, contradicting the Q-theory. This paper also proposes a rational explanation for these findings. A general equilibrium model with production, in which investment projects involve time-to-build, can rationalize these findings. The model is also able to explain the negative correlation of investment growth and stock returns at the aggregate level—an observation that has been interpreted as evidence for irrational markets since it cannot be reconciled with the Q-theory of investment.

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