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

47 Pages Posted: 13 Feb 2013

See all articles by Vidhan K. Goyal

Vidhan K. Goyal

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Takeshi Yamada

Australian National University (ANU)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2001

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.

Note: Previously titled "Asset Price Bubbles, Liquidity, and Investment: Evidence from Japan"

Keywords: Investment, financial constraints, asset price shocks, lending channel, Japan

JEL Classification: G31, G32

Suggested Citation

Goyal, Vidhan K. and Yamada, Takeshi, Asset Price Shocks, Financial Constraints, and Investment: Evidence from Japan (June 2001). Available at SSRN: https://ssrn.com/abstract=274970 or http://dx.doi.org/10.2139/ssrn.274970

Vidhan K. Goyal (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7678 (Phone)
852-2358-1749 (Fax)

HOME PAGE: http://www.vidhangoyal.com

Takeshi Yamada

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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