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

  • Vidhan K. Goyal

    (Hong Kong University of Science and Technology)

  • Takeshi Yamada

    (National University of Singapore)

We examine corporate investment spending around the asset price bubble in Japan in the late 1980s and make three contributions to our understanding of how stock valuations affect investment. First, 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 investment cash flow sensitivity is affected more by changes in monetary policy than by shifts in collateral values. Third, asset price shocks primarily affect firms that rely more on bank financing and not necessarily those that use equity financing.

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File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB770107
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Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 77 (2004)
Issue (Month): 1 (January)
Pages: 175-200

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Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:1:p:175-200
Contact details of provider: Web page: http://www.journals.uchicago.edu/JB/

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  1. 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.).
  2. Ueda, Kazuo, 1990. "Are Japanese stock prices too high?," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 351-370, December.
  3. 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.).
  4. Simon Gilchrist & Charles P. Himmelberg, 1995. "Evidence on the Role of Cash Flow for Investment," Working Papers 95-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. 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.
  6. Robert S. Chirinko & Huntley Schaller, 1993. "Bubbles, fundamentals, and investment: a multiple equation testing strategy," Research Working Paper 93-03, Federal Reserve Bank of Kansas City.
  7. 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.
  8. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
  9. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 1999. "Investment behavior, observable expectations, and internal funds," Finance and Economics Discussion Series 1999-27, Board of Governors of the Federal Reserve System (U.S.).
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