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

Vidhan Goyal, Takeshi Yamada () and タケシ ヤマダ

No 2002-11, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

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.

Keywords: Investment; liquidity; asset inflation; Japan (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2002-09
Note: June 2001
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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/13895/wp2002-11a.pdf

Related works:
Journal Article: Asset Price Shocks, Financial Constraints, and Investment: Evidence from Japan (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitcei:2002-11

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