Investment Behaviors by Capital Good and Enterprise Size: Testing Capital Goods Heterogeneity and Capital Market Imperfection with the FSSCI

This paper examines the validity of the Multiple q model, an augmented version of the Tobin fs q theory to consider the heterogeneity of capital goods, using individual firm data which includes small and medium - sized enterprises as well as large ones. We divide capital goods into land and non - land tangible fixed assets, taking into account the imperfection of the capital market, and estimate the Multiple q investment equations by corporate size based on FY 2004 - 2013 annual survey slips of the Financial Statements Statistics of Corporations by Industry (FSSCI) collected by the Ministry of Finance, Japan. Our estimation results show that, irrespective of enterprise size, land itself should be treated as an independent capital good that incurs unique adjustment costs as confirmed by earlier studies on publicly listed Japanese firms, indicating the validity of the Multiple q model by considering explicitly the heterogeneity between land and non - land tangible fixed assets. However, at the same time, we find that variables such as debt ratio and tangibility that are considered as redundant under the standard Tobin fs q theory have significant explanatory power and that there are lumpy investment behaviors that cannot be handled by a smooth adjustment cost function presumed for the Tobin fs q theory. Our estimation results also suggest that the lumpiness of investment behaviors is higher for smaller firms and that capital market imperfection would constrain some lumpy investments.