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

Author

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  • Vidhan K. Goyal

    (Hong Kong University of Science and Technology)

  • Takeshi Yamada

    (National University of Singapore)

Abstract

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.

Suggested Citation

  • Vidhan K. Goyal & Takeshi Yamada, 2004. "Asset Price Shocks, Financial Constraints, and Investment: Evidence from Japan," The Journal of Business, University of Chicago Press, vol. 77(1), pages 175-200, January.
  • Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:1:p:175-200
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    References listed on IDEAS

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    Cited by:

    1. Hau, Harald & Lai, Sandy, 2013. "Real effects of stock underpricing," Journal of Financial Economics, Elsevier, vol. 108(2), pages 392-408.
    2. Nan-Kuang Chen & Hung-Jen Wang, 2007. "The Procyclical Leverage Effect Of Collateral Value On Bank Loans-Evidence From The Transaction Data Of Taiwan," Economic Inquiry, Western Economic Association International, vol. 45(2), pages 395-406, April.
    3. Jianjun Miao & Pengfei Wang & Lifang Xu, 2016. "Stock market bubbles and unemployment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 273-307, February.
    4. Thomas Chaney & David Sraer & David Thesmar, 2012. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment," American Economic Review, American Economic Association, vol. 102(6), pages 2381-2409, October.
    5. Pengfei Wang & Jianjun Miao, 2011. "Bubbles and Credit Constraints," 2011 Meeting Papers 94, Society for Economic Dynamics.
    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. Wenjuan Chen & Anton Velinov, 2012. "Do Japanese Stock Prices Reflect Macro Fundamentals?," SFB 649 Discussion Papers SFB649DP2012-037, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    8. Alberto Martin & Jaume Ventura, 2012. "Economic Growth with Bubbles," American Economic Review, American Economic Association, vol. 102(6), pages 3033-3058, October.
    9. Chaoshin Chiao & Weifeng Hung, 2006. "Stock Market Valuations Of R&D And Electronics Firms During Taiwan'S Recent Economic Transition," The Developing Economies, Institute of Developing Economies, vol. 44(1), pages 53-78.
    10. Chaoshin Chiao & Weifeng Hung & Cheng F. Lee, 2008. "Mispricing of Research and Development Investments in a Rapidly Emerging and Electronics-Dominated Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(1), pages 95-116, January.
    11. Chaoshin Chiao & Weifeng Hung & Cheng F. Lee, 2008. "Mispricing of Research and Development Investments in a Rapidly Emerging and Electronics-Dominated Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(1), pages 95-116, January.
    12. 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.
    13. 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.
    14. Bo, Hong & Driver, Ciaran & Lin, Hsiang-Chun Michael, 2014. "Corporate investment during the financial crisis: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 1-12.
    15. 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.
    16. 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.
    17. Günay, Hüseyin & Kılınç, Mustafa, 2015. "Credit market imperfections and business cycle asymmetries in Turkey," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 79-98.
    18. Aßmuth, Pascal, 2017. "Stock price related financial fragility and growth patterns," Economics Discussion Papers 2017-108, Kiel Institute for the World Economy (IfW).
    19. 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.
    20. 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.
    21. Miao, Jianjun & Wang, Pengfei, 2014. "Sectoral bubbles, misallocation, and endogenous growth," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 153-163.
    22. 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.

    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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