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Asset Price Shocks, Financial Constraints, and Investment: Evidence from Japan

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  • Goyal, Vidhan K.
  • Yamada, Takeshi

Abstract

This paper examines investment spending of Japanese firms around the "asset price bubble" in the late-1980s and makes three contributions to our understanding of how stock valuations affect investment. First, corporate investment responds significantly to nonfundamental components of stock valuations during asset price shocks; fundamentals matter less. Clearly, the stock market is not a 'sideshow'. Second, the time series variation in the sensitivity of investment to cash flow is affected more by changes in monetary policy than by shifts in collateral values. Finally, asset price shocks primarily affect firms that rely more on bank financing, and not necessarily those that use equity markets for financing. Only the investment of bank-dependent firms responds to nonfundamental valuations. In addition, the cash flow sensitivity of bank-dependent firms with large collateral assets decreases when asset prices become inflated, but increases dramatically when asset prices collapse and monetary policy tightens.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13895/1/wp2002-11a.pdf
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Bibliographic Info

Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2002-11.

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Length: 45 p.
Date of creation: Sep 2002
Date of revision:
Handle: RePEc:hit:hitcei:2002-11

Note: June 2001
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Keywords: Investment; liquidity; asset inflation; Japan;

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  1. Huntley Schaller & Robert Chirinko, 1993. "Bubbles, Fundamentals, and Investment: A Multiple Equation Testing Strategy," Carleton Economic Papers 93-08, Carleton University, Department of Economics, revised Aug 1996.
  2. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
  3. Takeo Hoshi & Anil K. Kashyap, 1990. "Evidence on q and investment for Japanese firms," Finance and Economics Discussion Series 136, Board of Governors of the Federal Reserve System (U.S.).
  4. Simon Gilchrist & Charles P. Himmelberg, 1993. "Evidence on the role of cash flow for investment," Finance and Economics Discussion Series 93-7, Board of Governors of the Federal Reserve System (U.S.).
  5. Ueda, Kazuo, 1990. "Are Japanese stock prices too high?," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 351-370, December.
  6. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
  7. Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series 154, Board of Governors of the Federal Reserve System (U.S.).
  8. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  9. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006. "Investment Behavior, Observable Expectations, and Internal Funds," American Economic Review, American Economic Association, vol. 96(3), pages 796-810, June.
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Citations

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Cited by:
  1. Martin, Alberto & Ventura, Jaume, 2010. "Economic Growth with Bubbles," CEPR Discussion Papers 7770, C.E.P.R. Discussion Papers.
  2. Caton, Gary L. & Chan, Justin S.P. & Goh, Jeremy & Yang, Sheng-Yung, 2011. "An analysis of Japanese earnings forecast revisions with application to seasoned equity offerings," International Review of Economics & Finance, Elsevier, vol. 20(3), pages 376-387, June.
  3. Grundy, Bruce D. & Li, Hui, 2010. "Investor sentiment, executive compensation, and corporate investment," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2439-2449, October.
  4. Pengfei Wang & Jianjun Miao, 2011. "Bubbles and Credit Constraints," 2011 Meeting Papers 94, Society for Economic Dynamics.
  5. T. Chaney & D. Sraer & D. Thesmar, 2007. "Collateral Value and Corporate Investment: Evidence from the French Real Estate Market," Documents de Travail de la DESE - Working Papers of the DESE g2007-08, Institut National de la Statistique et des Etudes Economiques, DESE.
  6. Jianjun Miao & PENGFEI WANG, 2011. "Sectoral Bubbles and Endogenous Growth," Boston University - Department of Economics - Working Papers Series WP2011-032, Boston University - Department of Economics.
  7. Campello, Murillo & Graham, John R., 2013. "Do stock prices influence corporate decisions? Evidence from the technology bubble," Journal of Financial Economics, Elsevier, vol. 107(1), pages 89-110.
  8. Hau, Harald & Lai, Sandy, 2012. "Real Effects of Stock Underpricing," CEPR Discussion Papers 8820, C.E.P.R. Discussion Papers.
  9. Özgür Arslan-Ayaydin & Chris Florackis & Aydin Ozkan, 2014. "Financial flexibility, corporate investment and performance: evidence from financial crises," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 211-250, February.
  10. Pengfei Wang & Lifang Xu & Jianjun Miao, 2013. "Stock Market Bubbles and Unemployment," 2013 Meeting Papers 720, Society for Economic Dynamics.
  11. Wenjuan Chen & Anton Velinov, 2012. "Do Japanese Stock Prices Reflect Macro Fundamentals?," SFB 649 Discussion Papers SFB649DP2012-037, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  12. Gan, Jie, 2007. "Collateral, debt capacity, and corporate investment: Evidence from a natural experiment," Journal of Financial Economics, Elsevier, vol. 85(3), pages 709-734, September.
  13. Zhiwei Xu & Pengfei Wang & Jianjun Miao, 2013. "A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles," 2013 Meeting Papers 167, Society for Economic Dynamics.

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