A parsimonious model of capacity expansion is proposed for the United States paper and paperboard industries. The work grows out of Tobin's q theory, which suggested that the ratio between market value and replacement cost of capital is crucial in investment decision making. The model assumes that firms in the two industries are price takers, with a marginal cost of production equal to the average cost. The q values for the paper and paperboard industries were calculated as the ratios of the shadow price of existing capacity to the cost of new capacity. Annual data from 1958 to 1988 were used for estimation, with static and dynamic models of capacity changes. The results showed that a single dynamic equation using the q ratios alone explained most of the gross changes in capacity in both the paper and paperboard industries of the United States during the period considered.