Discussion Paper No. 681

INFORMATION, INVESTMENT,AND THE STOCK MARKET:A STUDY OF INVESTMENT REVISION DATA
OF JAPANESE MANUFACTURING
INDUSTRIES
Kazuo Ogawa
andKazuyuki Suzuki

January 2007

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

Discussion Paper No. 681

INFORMATION, INVESTMENT,AND THE STOCK MARKET:A STUDY OF INVESTMENT REVISION DATA
OF JAPANESE MANUFACTURING
INDUSTRIES
Kazuo Ogawa
andKazuyuki Suzuki

January 2007

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

August 2006
First Revision December 2006

Information, Investment, and the Stock Market:
A Study of Investment Revision Data of Japanese Manufacturing Industries*

Kazuo Ogawa
Institute of Social and Economic Research
Osaka University

Kazuyuki Suzuki
School of Commerce
Meiji University* The authors are grateful to Kazumi Asako, Shin-ichi Fukuda, Masaharu Hanazaki, Hideo Hayakawa,
Satoshi Kawanishi, Junichi Nakamura, Yutaka Soejima, Wataru Takahashi, Fukuju Yamasaki, andparticipants of the seminars at the Bank of Japan and Development Bank of Japan for extremely
valuable comments and suggestions on an earlier version of the paper. This research is partially
supported by Grant-in-Aid for Scientific research (#16330038) from the Japanese Ministry of
Education, Culture, Sports, Science and Technology in 2004 to 2006. Any remaining errors are thesole responsibility of the authors.

Abstract

We examined investment behavior in the Japanese manufacturing industry using
investment revision data to analyze investment behavior from a fresh angle. We tested themartingale investment hypothesis and then the q-theory of investment by looking at the
response of stock return and investment to news arriving at firms. The martingale
hypothesis was generally accepted, and we also found evidence for the validity of the
q-theory hypothesis. Investment was responsive to profit rate revision and sales revision,
but stock return responded only to profit rate revision. Further investigation revealed thatinvestment was also motivated by expansion of market share for sales, especially forindustries with rapid technological progress.

JEL Classification Number: E-22, E-44
Keywords: Investment revision, martingale, stock return, q theory, market share, flexible
accelerator theory

Correspondence to:Kazuo Ogawa
Institute of Social and Economic Research, Osaka University,
6-1 Mihogaoka, Ibaraki, Osaka, 567-0047 JAPAN
Tel: +81- 6- 6879-8570 Fax: +81- 6-6878-2766
E-mail: ogawa@iser.osaka-u.ac.jp

11. Introduction
Current fixed investment, added to capital stock, contributes to future production
activities. Thus future prospects of output markets as well as production factor markers
are of paramount importance in determining investment. Although the importance of
expectations with respect to investment activities has been well recognized, there havebeen very few studies that have tackled directly how incoming information makes firms
change their expectations and thus revise their investment plans. This is mainly because
expectation is intrinsically unobservable and researchers have to somehow specify thestochastic process driving the basic factors of investment. Under the assumption that thefirm’s optimal investment plan is determined by maximizing its firm value, one ingenious
bypass to avoid handling expectations is the use of stock market information forconveying all of the information that is relevant for investment. That is, the future
profitability of the investment is summarized into one variable, Tobin’s q.1 Appealing as
this theory is, empirical work is not necessarily supportive of the positive relationshipbetween investment and the stock market.2
In this study we examined how new information is utilized in revising investment plansin Japanese manufacturing industries. A new feature of our study is the use of investment
revision data in the Short-term Economic Survey of Enterprises in Japan (Tankan),compiled by the Bank of Japan, without imposing any assumptions on a prior expectation
formation by firms. By regressing investment revision based on incoming information,
we may discover how firms revise their investment in response to incoming information.
Moreover, under the rational expectation hypothesis, investment reflects all of theinformation available to the firm that is relevant to the future prospects of output markets
as well as input factor markets. It implies that investment revision is a martingale, as isshown below. The martingale property of investment is in line with that of consumption
originally derived by Hall (1978) from the permanent income hypothesis. We can test
this martingale hypothesis using investment revision data.
Our approach has another advantage in that we can test the well-celebrated q-theory ofinvestment by examining simultaneously the response of stock price, as well as
investment, to incoming information.
2

Our main findings are as follows: First, on the whole, firms make their investment plansby fully exploiting all available information, in the sense that the information available
before the revision date has no explanatory power in predicting investment revision.
Second, investment revision and stock return are significantly affected by a revision of
the profit rate. This might explain the positive correlation between investment and stock
return. Third, once sales revision is taken into consideration, investment revision is more
responsive to sales revision than is profit revision. However, stock return does not
respond to sales revision, which implies that the relationship between investment andstock return is not stable. Rather, our evidence suggests that attention should also be paid
to the market share aspect of the investment decision, as investment is partly driven by thefirm’s desire to expand its market share for sales.
This paper is organized as follows: In Section 2, after a brief explanation of a theoreticalidea underlying our empirical work, we specify equations to be estimated that associate
investment revision with incoming news. We also set up a framework to test the q-theoryof investment. Section 3 describes our data on investment revision. Section 4 shows
empirical results and discusses their implications. Section 5 concludes this study.

2. Investment Revision and Incoming News: Theory and Empirical Strategy
Investment revision and martingale
It is a general principle that the optimal investment of a firm is determined byintertemporal optimization. The objective function of the firm and the constraints are notspecified at this time. The optimal investment in the period t ( I t ) is written as a functionof the information available to the firm in the period t, denoted by Ω t .
I t = f (Ω t )(1)

Suppose that a firm makes its first investment plan for period t in the period t sub-period,
t1 . For example, the period corresponds to the year and the sub-period corresponds to aquarter. We assume that the investment plan is revised in the subsequent sub-periods
t 2 , t 3 ,L, t k of period t. That is, the investment is revised k-1 times in period t before theinvestment plan is finally materialized. Figure 1 shows the process of investment revision3

in period t until a final determination of the plan is made. We denoted the investment planfor period t in sub-period t j by I t j ,t . Under a rational expectation assumption, theinvestment plan reported by the firm is a mathematical expectation that is conditional on
the information set ( Ω t j ) available to the firm in sub-period t j , or[I t j ,t = E I t Ωt j]

(2)

The expected growth rate of investment for period t based on Ω t j is given by

Gt j ,t ≡⎡ I⎤= E ⎢ t Ωt j ⎥I t −1⎣ I t −1⎦

I t j ,t(3)

The investment plan is revised by incoming information, so that the revision of theinvestment growth rate between t j and t l (tl > t j ) , denoted by RGt j , t l , is written as

RGt j , t l ≡I tl ,tI t −1

−

⎡ I
⎤
⎡ I
⎤
= E ⎢ t Ωtl ⎥ − E ⎢ t Ωt j ⎥I t −1⎣ I t −1⎦
⎣ I t −1⎦

I t j ,t(4)

Because no information is lost, or Ω t j ⊂ Ω tl ,[]E RGt j , t l Ω t j = 0(5)Equation (5) implies that the revision of the investment growth rate between t j and t l isa martingale.3 The revision of the investment growth rate between t j and t l is driven by
the information arriving between the sub-period t j and t l , but no variable in theinformation set Ωt j can predict the revision of the investment growth rate between t j
and t l .
Specifically, we assumed that the revision of the investment growth rate between t j and4t l is a linear function of the information arriving between the sub-period t j and t l .
m

RGt j , t l = ∑α i xi ,t j , t l

(6)

i =1

where xi ,t j ,t l : i-th information arriving between the sub-period t j and t l
xi ,t j ,t l ∈ Ωt l − Ωt j

When the variables in the information set Ωt j were added to the explanatory variables inEquation (6), the corresponding coefficient estimates should be jointly zero. That is,

m

n

i =1

i =1

RGt j ,t l = ∑α i xi ,t j , t l + ∑ β i yi , t j(7)

where yi ,t j ∈ Ωt j

The test of martingale hypothesis is reduced to the test of the null hypothesis, thatβ1 = β 2 = L β n = 0 , in Equation (7).
Investment and stock return
Now, we will be more specific about the objective function of the firm. The standard
assumption in the investment literature is that of value maximization. It is well known
that Tobin’s q, ratio of firm value to the replacement value of capital stock, is a sufficientinvestment statistic. The implications for the relationship between investment revisionand stock price are straightforward. The firm revises the investment plan in response to
any information that affects its firm value. Accordingly, the stock price also responds tothe same information. Let zt j ,t l be information arriving between the sub-period t j and t lthat affects the investment plan. Excess stock return between the sub-period t j and t l( Rt j ,t l ) is also affected by zt j ,t l .4
From the above discussion we can derive an investment function that has stock return as
an explanatory variable. Both investment revision and stock return constitute a functionof common information, zt j ,t l , or5

RGt j , t l = a0 + a1 zt j ,t l + vt j ,t l
Rt j ,t l = b0 + b1 zt j ,t l + ε t j ,t l

(8)
(9)

where vt j ,t l : measurement error of investment growth rate uncorrelated withzt j , t l

ε t ,t : other factors, uncorrelated with zt ,t and investment revision, that
j

l

j

l

affect stock returna1 > 0, b1 > 0

Eliminating zt j ,t l from Equations (8) and (9), we obtain

RGt j ,t l = a0 −a1 a1a+ Rt j ,t l − 1 ε t j , t l + vt j , t l
b1 b1
b1

(10)

Equation (10) states that the revision of investment growth rate is positively correlatedwith stock return. However, an estimation of Equation (10) by ordinary least squares(OLS) yields a biased estimate of the stock return coefficient because stock return iscorrelated with the composite error term. Because stock return is negatively correlatedwith the error term, we will have a downward biased estimate. The above argument
illustrates why we often obtain a weak positive or sometimes a negative relationshipbetween stock return and investment in empirical studies.5 6 We will show that this isexactly the case for our data set in Section 4.

3. Data Description of Investment Revision
The Short-term Economic Survey of Enterprises, called TANKAN, is a quarterly
survey of enterprises conducted by the Bank of Japan to provide an accurate picture ofbusiness trends in Japan. In the survey, responding enterprises are asked to provide annual
forecasts for several items that include fixed investment.7 Sample aggregates by industry
and firm size are released as a projected year-to-year percentage change in investment.
The survey is conducted quarterly in March, June, September, and December. The survey
results are released at the beginning of April, July, October, and in mid-December. The
6

annual investment projection for a certain fiscal year is first released in March of theprevious fiscal year, and is revised five times, in June, September, December, March, andJune of the following fiscal year, when the final figure is settled. Therefore, we cancalculate the revision of the projected investment growth rate five times. There is,however, a caveat. In the first survey conducted in March of the previous fiscal year, thedenominator in calculating growth rate is not a final one, and thus the investment revisionfrom March to June reflects not only the change in projected annual investment(numerator) but also a change in the denominator. Thus, the investment revision fromMarch of the previous fiscal year to June is not comparable to other revisions.
Furthermore, the revision from March to June of the following fiscal year is a kind of
ex-post revision and differs in nature from other revisions. Therefore, we used three of therevision series of annual investment growth rate: those from June to September, from
September to December, and from December to Match.
The sample period covers from 1975 FY to 2002 FY.8 We used only investment revision
data from large enterprises because most of the medium-sized and small enterprises are
not listed. Note that an examination of the relationship between investment and stock
return is valid as long as the enterprises are listed.9 In regression analysis, we pooled timeseries data across industries to increase observations. We used 12 manufacturingindustries: textiles; pulp and paper; petroleum and coal products; ceramics, stone, andclay; iron and steel; non-ferrous metals; food and beverages; processed metals; industrial
machinery; electrical machinery; and transportation machinery and precision machinery.
Figure 2 shows the annual projection of the investment growth rate of manufacturing as awhole for 1975 FY– 2000 FY, every five years. The five figures are annual projections
made in June, September, December, March, and June in the following fiscal year,
respectively. It appears that the annual projection is revised upward in September andDecember and then slightly revised downward after December, except for 1975 FY and1985 FY. The Bank of Japan explains this pattern as follows: In the early stage ofinvestment planning new plans become concrete and the plans that were unfinished in theprevious fiscal year are added. This leads to an upward revision of investment plan.
However, delays in construction and the postponement of plans are observed at the late7

stage of investment planning, which leads to downward revision of plans. If this is thecase, then the investment revision might not be a martingale in the rigorous sense. We will
examine this in detail in the next section.

4. Estimation Results and Their Implications
Incoming information and investment revision
We examined how the projection of annual investment growth rate is revised byincoming news. We regressed a revision of the projected annual investment growth rate
(REVINV) on the variables that represent incoming news. The TANKAN survey alsocollects useful information on incoming news. This information consists of a projectionof the profit rate, measured by the ratio of current profit to sales, and the sales growth rate.
Thus a revision of profit rate (REVPROFIT) and of the sales growth rate (REVSALE) arereadily calculated. Note that REVPROFIT and REVSALE are a revision of the projectedannual profit rate and sales growth rate, respectively, similar to the definition of the
REVINV variable.
Regression analysis was conducted separately for three revision dates (June–September,
September–December, and December–March), because the response of investment toarriving news will depend on the stage of investment planning. The response might be
weaker at the early stage of the investment plan because firms can easily change aninvestment plan at a later stage. As the investment plan gets materialized, the firms might
be more responsive to incoming news.
By pooling time-series data across the 12 industries, we estimated the investment revisionequation by OLS. The industry effects were taken into consideration by means of industry
dummies. For the regression of the September–December and December–March revision
data, we added the lagged revision to examine the persistency of the investment
projection. When a martingale is held rigorously, we expect that the current revision is notaffected by the lagged revision. 10 Estimation results of regressing REVINV on
REVPROFIT and REVSALE are shown in Table 1.11 A revision of both the profit rate
and the sales growth rate had significantly positive effects on the revision of theinvestment growth rate for all of the revision dates, if used alone. An upward revision of8the profit rate by 1% raises the revision of the investment growth rate by 3–4% points,
while an upward revision of the sales growth rate leads to an approximate 0.6%-point
upward revision of the investment growth rate. However, when a revision of both theprofit rate and the sales growth rate are taken into consideration simultaneously, therevision of the profit rate is no longer significant for the December–March revision, while
the revision of the sales growth rate remains significant at the 1% level for all of therevision dates. Surprisingly, a lagged investment revision had a significant effect on
current investment revision. In the September–December revision, lagged investment had
positive effects, while in the December–March revision it had negative effects. This result
confirmed statistically the persistence of the projection of the annual investment growthrate, as seen in Figure 2. This suggests that the martingale hypothesis was not held
rigorously.
We extended our analysis by adding more variables representing arriving news to thetwo basic revision variables used above. We constructed variables representing incomingnews by VAR. Specifically, we estimated the following six-variable VAR system onquarterly data for 1975 FY–2002 FY. The variables we used were the rate of change in thecorporate goods price index relative to the investment goods price and sales. In addition,
we used stock returns and the change in the average variable cost, measured by sales cost
divided by sales, the borrowing interest rate and diffusion index of lending attitude offinancial institutions. 12 Note that all of the variables used in the VAR analysis arequarterly realized values, not revisions of annual projections. They are seasonallyunadjusted, so we also added seasonal dummies. A six-variable VAR is estimated for eachindustry and we defined the incoming news variable as a one-period-ahead forecast error.
In regression analysis, we used four variables of incoming news. They were forecast
errors of the rate of change in corporate goods price relative to investment goods price(REVPRICE), the change in the average variable cost (REVAVECOST), the borrowinginterest rate (REVINT), and the diffusion index of lending attitude of financial
institutions (REVLEND). The regression results are shown in Table 2. The
REVAVECOST variable was significant. Shock of the rate of change in the averagevariable cost exerted significant positive effects on the June–September and9

December–March investment revision. The average variable cost reflects the capacity
utilization rate, so it is quite legitimate to suggest that investment is revised upward when
the rate of change in the average variable cost increases. Note that the revision of the
profit rate ceases to be significant for the September–December and theDecember–March revision date, while the revision of the sales growth rate remains
significantly positive for every revision date. This suggests that the revision of the sales
growth rate is more important than that of the profit rate in revising the investment growthrate.
Next, we conducted the martingale test by adding variables available for the firm when
the initial projection of the investment growth rate is made. Because we already knew thatthe lagged investment revision was a significant explanatory variable, our test wasconditional on the persistence of the investment revision. We added the following fivevariables and tested the null hypothesis that the corresponding coefficients were jointly
zero. The variables we considered were the first lag of the rate of change in the corporate
goods price index relative to the investment goods price and the change in averagevariable cost, the borrowing interest rate and diffusion index of the lending attitude, andthe stock return. The test statistics are shown in Table 3. The null hypothesis was not
rejected at the conventional significance level for the June–September and theDecember–March revision and it was not rejected at the 1% significance level for the
September–December revision.13 It would be fair to say that the martingale hypothesis
was conditional on the persistence of the investment revision.

Stock market and investment revision
As was discussed in Section 2, we expected to observe co-movement of investment
revision and stock return in value-maximizing firms when they are driven by the same
factors. In this section we examine the relationship between the revision of the investment
growth rate and the stock return. First we regressed the quarterly stock return on the twobasic variables used in the investment revision regression: the revision of the profit rate
and the sales growth rate. The quarterly stock return was calculated as follows: the stock
price index quoted in the Tokyo Stock Exchange, available monthly by industry. We first10

calculated the quarterly average of the stock price index, and then we calculated thequarterly stock return for each industry as the rate of change in the quarterly stock price.14
Table 4 shows the regression results of the quarterly stock return on the two revisionvariables. 15 Revision of both the profit rate and the sales growth rate had significantly
positive effects on stock return, except in the December–March period, when it was usedalone. The explanatory power of the sales growth revision was much lower than that ofthe profit rate. The adjusted R-squared ranged from -0.01 to 0.04 for the sales growthrevision, while it ranged from -0.01 to 0.14 for the profit rate revision. When bothrevision variables were taken into consideration at the same time, the revision of the
profit rate remained significant but that of the sales growth rate lost its significance. It
appeared that the stock return was driven by new information associated with the profit
rate.16 This evidence is in accord with the q-type investment theory.
In section 2 we stated that the OLS estimation of the relationship between investment
revision and stock return should lead to a downward biased estimate. Table 5 shows theregression results of investment revision on stock return.17 The first column of eachrevision date shows the estimation results by OLS. Stock return had a significantly
positive coefficient only in the June–September revision period. The second column ofeach revision date shows the estimation results from the instrumental variable (IV)method, to correct possible correlation between stock return and the error term. We used
the lagged stock return as the instrument. In this case, the stock return had significantly
positive coefficients in all of the revision dates. Furthermore, the coefficient estimatesfrom the IV method were much larger than those from OLS. This is exactly the casediscussed in Section 2, and it indicates that both the investment revision and stock return
were driven by the same factor: revision of the profit factor. However, the stock return
was also affected by other factors uncorrelated with investment revision.
We extended this analysis by adding more explanatory variables. First, we added arevision of the sales growth rate in the investment revision equation. The third column ofeach revision date in Table 5 shows the estimation results from the IV method. A lagged
stock return was used for the instrument for the current stock return. The coefficientestimate of stock return got smaller, and they were barely significant for the11June–September and December–March revision dates. However, the coefficient estimateof the stock return was no longer significant for the September–December revision date.
In the second extension we added four one-period forecast errors calculated from the
VAR analysis above, as well as the sales growth revision, as explanatory variables.
Estimation results by the IV method are shown in Table 6. Stock return still exerted apositive effect on the investment revision, but it was significant only for theJune–September revision date. However, the effects of sales growth revision on
investment revision remained significantly positive for all of the revision dates.
In summary, a revision of the profit rate affected both the investment revision and stock
return, but once the revision of the sales growth rate was taken into account, the profit rate
revision variable lost its significance in the investment revision equation, although it
remained significant in the stock return equation. The q-theory predicts that the stock
return will respond in the same direction to the information that affects investment
revision, which is not necessarily supported by our estimation results. There are several
interpretations of our results. First, it is possible that the q-theory will keep its validity in
explaining investment behavior once the perfect competitive assumption of productmarket underlying the q-theory is relaxed. When a firm faces a downward demand curve,
the average q contains not only the marginal profitability of the investment (marginal q)
but also the monopoly rent of the firm, which, in turn, is affected by sales growth.
Schiantarelli and Geogoutsos (1990) and Galeotti and Schiantarelli (1991) formallydemonstrated that the output variable enters q-type investment functions with a negativesign. Contrary to the theoretical prediction, we observed a positive correlation between
current investment revision and current sales growth revision.18
Secondly, our evidence was also consistent with a flexible accelerator model ofinvestment, where sales are the most important factor in determining investment. Abeland Blanchard (1988) rebuilt the traditional flexible accelerator model in an intertemporalcontext. Taking future sales as a given, they derived an optimal investment rule byminimizing the production cost in combination with the adjustment cost of investment.
Investment narrowed the gap between optimal capital stock and the initial existing capitalstock. Optimal capital stock is defined as the present discounted value of expected future
12sales. When the firm obtains information that is useful for revising future sales growth,
the firm will exploit that information and revise the optimal capital stock accordingly.
Thus, the investment plan will also be revised. As appealing as this theory is, more
empirical work is needed to support it. Specifically, we need to conduct a direct test by
estimating the Euler equation of the investment derived from intertemporal cost
minimization.
Thirdly, it has been frequently asserted that the investment of Japanese firms is motivatedby growth considerations, in addition to profit maximization. The Development Bank ofJapan conducted an interesting survey on investment in 1999, released as the Corporate
Investment Attitude Survey in The Development Bank of Japan (1999). This survey
covered 3302 companies whose equity capital is one billion yen or more and was
designed to elucidate the present condition of, and change in, investment behavior. The
survey asked the following question to the firms involved: Has the maintenance andexpansion of market share for sales been a driving force of investment acceleration in the
80s, and in the 90s? Eighty-two percent of the respondents in manufacturing industries
answered “yes” for investment acceleration in the 80s and 64% for investment
acceleration in the 90s. This illustrates the importance of market share considerations inunderstanding the investment behavior of Japanese firms.19 This will be especially true
for firms in industries with rapid technological progress, because investment in theseindustries will embody new technology; therefore, those firms that do not increase
investment in response to increasing demand will not benefit from new technology andwill eventually lose their competitive edge.20 If this interpretation is valid, investment
revision in industries with rapid technological progress will be more responsive to sales
revision. To test this conjecture, we compared the response of investment revision to sales
growth revision in industries with high and low technological progress. Specifically, weconstructed the industry dummy for machinery industries that are expected to have hightechnological progress and added the cross term of the industry dummy with sales growthrevision in the investment revision equations.21
Table 7 shows the estimation results. The cross term was significantly positive for all of
the revision dates, irrespective of the specification of the investment equations. 22 It
13

implies that the investment revision is much more responsive to the revision of sales
growth for industries with rapid technological progress. This lends empirical support toour third interpretation, that maintenance or expansion of market share for sales is a major
concern informing the investment decisions of firms .

5. Concluding Remarks
This study examined the investment behavior of Japanese manufacturing industries
based on investment revision data. Use of investment revision data enabled us to shedlight on investment behavior from different angles. First, we tested the martingale
hypothesis of investment, which says that information is utilized efficiently in planninginvestments. Second, we examined the q-theory of investment by looking simultaneously
at the response of stock return and investment to incoming news.
We found that the martingale hypothesis is generally accepted, in the sense that the
information available to a firm prior to their investment revision does not affect theinvestment revision, although we observed some persistence of investment revision. We
also found evidence favorable to the q-theory. That is, both stock return and investment
revision respond in the same direction to a revision of the profit rate. However, once therevision of sales growth rate is taken into consideration, investment is responsive to sales
revision, but stock return is not. Our evidence hints that the q-theory alone is not
sufficient to explain the investment behavior of Japanese manufacturing firms. One
possible approach, then, would be to take account of the market share aspect ininvestment decisions. This is especially useful in explaining the investment behavior ofmachinery industries characterized by rapid technological progress. More investigation
into a firm’s investment motivation, consistent with observed investment activities,
would constitute a promising avenue for future research.

14

Footnotes1

For seminal work on Tobin’s q, see Tobin (1969) and Hayashi (1982).
There are numerous studies on the relationship between the stock market andinvestment. For example, see Barro (1990), Morck et al. (1990), Blanchard et al. (1993),
and Lamont (2000).
3Schankerman (2002) was the first to demonstrate that investment revision is amartingale.
4
For formal discussion see Pakes (1985) and Schankerman (2002).
5
See Lamont (2000) for another reason why we observe a negative correlation between
stock return and investment.
6
It is straightforward to extend the one variable case above to a multiple variables case, toobtain the relationship between stock return and investment.
7
Fixed investment is defined as the amount of newly listed tangible fixed assets including
new land purchase expenses. Note that it includes the amount newly appropriated inongoing construction, but excludes the amount transferred from in-progress construction
to property, plants, and equipment.
8
TANKAN survey has been revised from the March 2004 survey, so that our sample
period covers up to 2002 FY to maintain continuity of the data series. .
9Large enterprises are defined as those with 1000 employees or more.
10
For the June–September revision regression we do not add the lagged revision because
the March–June revision is contaminated by the final investment update in the previous
year, as noted in Section 3.
11
The projection of the profit rate in the June survey is only available after 1984, so thenumber of observations in the June–September investment revision regression is less thanin the other regressions.
12
The variables of sales, sales cost, and borrowing interest rate were taken from
Financial Statement Statistics of Corporations by the Ministry of Finance. They areavailable by industry and by firm size, and measured by equity capital. Our figures arethose of large corporations whose equity capital is more than one billion yen. The Bank ofJapan compiles data on corporate goods price and the diffusion index of lending attitudeof financial institutions, which is taken from the Short-term Economic Survey ofEnterprises.
13
The martingale test was also conducted for the case without lagged investment
revisions as explanatory variables. The test statistics were 2.26 and 1.23 for the
September–December and the December–March revision, respectively, and the test
results in the text remained unaltered.
14
It would be ideal to use excess stock return rather than stock return per se. However,quarterly return of the appropriate safe asset to be subtracted from the stock return was
not available, so we used stock returns. Our approach is justified as long as the return ofriskless asset is constant over time.
15
Industry dummies are also used as regressors.
16
Our evidence, that profit rate revision is more useful in predicting stock return,remained unaltered even when we added residual variables constructed from the VAR
analysis above as explanatory variables.
2

15

17

Industry dummies as well as lagged investment revision are also explanatory variables.
See also Lindenberg and Ross (1981) and Ogawa and Kitasaka (1999) for the
association of monopoly rent with average q and investment.
19
Development Bank of Japan (2001) estimated investment equations with qualitative
survey results as an explanatory variable, using a panel data set. They found that theinvestment rate of the firms that linked maintenance and expansion of market share forsales with investment acceleration was significantly higher.
20
It has also been argued, from the standpoint of R&D investment, that the fraction of
R&D expenditure, considered as a fixed cost, is high for machinery industries and, as
sales increase, the cost burden of R&D expenditure decreases, which induces the firms inmachinery industries to expand market share.
21
Machinery industries cover the machinery, electrical machinery, transportationequipment, and precision instruments industries.
22
We tried the case where the cross term of the industry dummy with profit rate revision
is also added as an explanatory variable. It was insignificant for all of the revision dates,
while the cross term of the industry dummy with sales growth rate remained significantly
positive, irrespective of the revision date.
18

16

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[2] Barro,R.J. (1990).” The Stock Market and Investment,” Review of Financial Studies
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17

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18

Figure 1
Process of Investment Revision in Period t

Period t

Sub-period

t1

t2

t3

First
First
Secondinvestment revision revision
plan

tk
Final
revision,
which is executed

Figure 2
Annual Projection of Investment Growth Rate
40

30

%

20

10

0
June

September

December

March

June (actual)

-10

-20
1975

1980

Source: The Bank of Japan, Short-term Economic Survey of Enterprises.

1985

1990

1995

2000

Table 1
Revision of Projected Annual Investment Growth Rate and Arriving News: Basic Case
Explanatory
variables
REVPROFITREVSALE

June to September
3.8694***(5.92)
0.6394***(6.73)

2.6748***(3.59)
0.4028***(3.15)

Lagged investment
revision
Adjusted R 2
S.E.

Investment Revision
September to December

0.15440.03670.14190.03810.18640.03603.0258***(3.26)

1.8453*(1.80)
0.6536*** 0.4994***(3.77)(2.59)

December to March
4.0507***(3.50)
0.6744****(5.86)

1.1311(0.88)
0.6176***(4.68)

0.3099*** 0.2808***(2.94)(2.65)

0.2532**(2.37)-0.5374*** -0.5481***(-11.52) (-12.15)-0.5502***(-12.18)0.08630.07190.10340.07120.29600.0601

0.34220.0581

Notes: The values in parentheses are t-values.
Estimates of constant and industry dummies are suppressed.
***, **, * significant at 1%, 5%, and 10% level, respectively.

0.09670.07150.34270.0581

Table 2
Revision of Projected Annual Investment Growth Rate and Arriving News:
Extended Case

Explanatory
variables

June to September

Investment Revision
September to December

December to MarchREVPROFIT

2.6224***(3.50)

1.5428(1.44)

1.4110(1.09)REVSALE

0.4889***(3.76)-0.3433(-1.39)0.6500**(2.15)
0.8944(1.27)-0.0298(-0.97)0.5795***(2.80)-0.1058(-0.33)0.0115(0.02)-0.8938(-0.77)
0.0663(1.42)
0.2575**(2.39)

0.6506***(4.93)-0.3631(-1.43)
1.1653***(3.07)
0.6899(0.84)
0.0125(0.42)-0.5564***(-12.40)0.20310.03560.1006
0.07130.35780.0574REVPRICEREVAVECOSTREVINT
REVLEND
Laggedinvestment
revision
Adjusted R 2
S.E.

Notes: See the notes in Table 1.

Table 3
Test Statistics of Martingale Hypothesis

Investment revision
June to September

September to December

December to March

F(5,217)0.6059 (0.70)

Test Statistics
F(5,288)
2.3721 (0.04)

F(5,288)
1.3442 (0.25)

Notes: Values in parenthesis are p-values.

Table 4
Stock Return and Arriving News
Explanatory
variables
REVPROFITREVSALE

Adjusted R 2
S.E.

June to September

Stock Return
September to December

10.5092***
10.6400***(6.87)(5.97)
0.9671*** -0.0441(4.47)(-0.14)6.3515***(5.36)

0.14200.08590.0731
0.0952

Notes: See the notes in Table 1.

0.04240.08680.13820.0861

December to March
2.2060(1.43)

0.4294*(1.87)

6.8639***(5.05)-0.1948(-0.77)-0.00420.09910.07190.0953-0.01350.08080.2059(1.29)

1.6129(0.91)
0.1242(0.68)-0.01470.0808-0.01530.0809

Table 5
Stock Return and Revision of Projected Annual Investment Growth Rate: Basic Case
Explanatory
variables
Stock return

June to September
OLS
IV
IV
0.0869*** 0.2622**(3.36)(2.21)REVSALE

0.2312*(1.90)
0.4158***(2.66)

Lagged investment
revision
Adjusted R 2
S.E.

Investment Revision
September to December
OLS
IV
IV
0.0328(0.77)

0.3651**(2.22)

0.3956*** 0.3316***(3.81)(2.81)
0.04780.0401

Notes: See the notes in Table 1.

0.0431

0.04110.0556
0.07310.0802

December to March
OLS
IV
0.0196(0.45)

0.7756**(2.09)

IV

0.2654(1.64)
0.5560***(2.88)
0.2477**(2.17)-0.5205*** -0.4641***(-10.96)(-6.41)0.5643*(1.65)
0.5463***(3.29)-0.5010***(-7.82)0.0756

0.2675
0.06130.07400.0867

Table 6
Stock Return and Revision of Projected Annual Investment Growth Rate:
Extended Case

Investment Revision
September to DecemberIV

December to MarchIV

Explanatory
variables

June to September
IV

Stock return

0.2181*(1.90)
0.5184***(3.66)-0.1135(-0.56)0.9249***(2.85)
0.8194(1.32)
0.0259(0.97)

0.2664(1.43)
0.5358**(2.30)
0.0825(0.22)-0.0130(-0.02)0.4443(0.29)
0.0098(0.14)
0.2493**(2.15)

0.3989(1.50)
0.6489***(4.64)-0.5186*(-1.76)1.3607***(2.96)
1.3359(1.28)
0.0372(1.02)-0.5216***(-9.40)0.04010.0761

0.0654REVSALEREVPRICEREVAVECOSTREVINT
REVLEND
Laggedinvestment
revision
S.E.

Notes: See the notes in Table 1.

Table 7
Revision of Projected Annual Investment Growth Rate and Market Share Hypothesis
Explanatory
variables
REVPROFITREVSALEREVSALE ×
Industry dummyJune to September
2.4094***2.4000***(3.22)(3.20)
0.2690*0.3525**(1.91)(2.46)
0.5368**0.5349**(2.21)(2.20)REVPRICEREVAVECOSTREVINT
REVLEND

0.2186**(2.02)-0.0132(-0.04)0.0584(0.11)-0.8364(-0.72)0.0739(1.58)
0.2224**(2.04)

0.11010.07090.10820.0710-0.3185(-1.30)0.7092**(2.36)
0.7777(1.11)-0.0241(-0.79)Lagged investment
revision
0.2002Adjusted R 2
0.0357
S.E.
Notes: See the notes in Table 1.

Investment Revision
September to December
1.54091.2257(1.49)(1.14)
0.3871*0.4468**(1.92)(2.05)
0.7492*
0.7940*(1.80)(1.87)

0.21660.0353

December to March
0.07240.3485(0.05)(0.25)
0.6194***0.6517***(4.72)(4.96)
1.2614**1.2812**(2.07)(2.13)-0.5590***(-12.38)-0.3558(-1.41)1.1784***(3.12)
0.6989(0.85)
0.0120(0.41)-0.5652***(-12.62)

0.34930.05780.36540.0571