Asset Price Shocks, Financial Constraints, and Investment: Evidence from Japan
54 Pages Posted: 26 Apr 2003 Last revised: 8 Nov 2017
Date Written: May 6, 2003
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 sensitivity of investment to cash flow 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 markets for financing.
Keywords: Investment, financial constraints, asset price bubble, Japan
JEL Classification: G31, G32
Suggested Citation: Suggested Citation