Silviase/jgov_v1.4_full_ann huggingface dataset:
any longer no matter how large an increase of net worth is. On the other hand, there is no lower limit to the level of investment in recession. The larger a decrease of net worth is, the more deeply the level of investment falls.

To quantify this asymmetry in the collateral role, we add a cross term of land value with the dummy variable(D1) to eqs.(23) to (25). The dummy variable D1 takes one for the business downturns and zero for otherwise. Thus if the above assertion is correct, then we find that the coefficient of the cross term is positive. The results of estimation are given by Table 14. In capital investment equation the cross term is significantly positive at the 1% level for all industries, manufacturing, chemicals, and real estate, while it has a significantly positive effect on borrowings for all industries, manufacturing, pulp, paper, and paper products, chemicals, and steel. Therefore it is likely that the collateral role of land varies in the phase of business cycles.

The cash flow is another variable to ease the borrowing constraints. It has a significantly positive effect on investment for all industries, construction, manufacturing, fabricated metal products, machinery, and electrical machinery. Judging from the results above, we can conclude that the firms are under borrowing constraints in nine industries out of fourteen industries in our sample.

Now let us summarize the channels through which the fluctuations in the asset markets propagate to those in the real economy and evaluate their quantitative importance based on the estimation results of the portfolio equations. In making decision on the level of investment to be undertaken the managers rely on the fundamentals rather than the market valuations, which implies that investment is less volatile than the stock price since the fundamentals fluctuate less than the stock price. However this does not deny any effects of a sharp rise of the stock price starting from the middle of 80's. As was seen in section 2, a large volume of equity was issued by large corporations during this period and this partly resulted from low cost of equity. We discussed above that the information transmission role of the stock market functioned very poorly during the period of persistent divergence of the stock price from the fundamentals. Note that the stock market has another important role to determine the cost of equity. This function enabled the corporations to raise a lot of funds from the capital market. $ ^{28)} $

Our, empirical evidence supports the role of land value as a collateral. Then excessive fluctuations of the land market are propagated directly into the real economy, and accelerate the business fluctuations. This is especially so in the periods of recession since the effect of land value on investment is larger in recession than in booms.

To sum up, the business fluctuations actually observed since the middle of the 80's are affected to a large extent by volatile movement of land prices, while the contribution by the stock market to the fluctuations is less obvious.

### 6. Concluding Remarks
With a view to analyzing the channel through which the fluctuations in the asset markets propagate to the real economy, we had a close look at the Japanese economy since the 80's. Japan experienced a more volatile movement of the asset prices than ever during this period. Our empirical study showed evidence for the active role of land stock as a collateral. The Japanese economy are now in the middle of deep recession, with the asset prices falling constantly. The collateral value of land has declined sharply, which has a negative effect on the level of investment and borrowings. To make matters worse, the role of collateral is more important for the portfolio allocations in the business downturns. Thus it is no wonder that the current recession is so severe.
## Footnotes

1) This naming of the current recession comes from the title of Miyazaki(1992) latest bestseller.

2) See Modigliani and Miller(1958,1963) and Miller and Modigliani(1961) for the original exposition of the Modigliani-Miller theorem.

3) There is a growing body of literature on this issue. For example, see Greenwald and Stiglitz(1988), Gertler and Hubbard(1988), and Bernanke and Gertler(1989) for theoretical developments. For empirical pieces on the effects of internal net worth on investment, see Fazzari, Hubbard, and Petersen(1988), Devereux and Schiantarelli(1990), Hubbard and Kashyap(1992), Whited(1992), and Hubbard, Kashyap, and Whited(1993).

4) Data on the SCOL, LCOL and SMALL variables come from Economic Statistics Annual, Bank of Japan. That on TOPIX is from Annual Statistics on Tokyo Stock Exchange, Tokyo Stock Exchange and the data of PLAND variable is taken from Land Price Index of Cities, Japan Real Estate Institute.

5) Unfortunately the SMALL variable is not available over the whole sample period, since the definition of small enterprises changed several times in the past. The consistent series is only available since 1977.

6) Miyagawa(1993) and Mitsui and Kawachi(1993) obtain evidence that asymmetry of information is notably observed for small-sized firms in Japan and that investment is much affected by the liquidity position of the firm which eases the borrowing constraints.

7) Hayashi(1982) states the conditions that guarantee the equality of the average q with the marginal q, present value of the marginal profitability from new investment divided by the price of investment goods. They include perfect competition in the product market and the technology of constant returns to scale.

8) The studies tackling this problem are now numerous, Bosworth(1975) asserts that the managers will neglect what is going on in the stock market and follows the fundamentals. Fischer and Merton(1984) asserts that as long as the value maximization of the current stockholders is the principal objective of the corporations, then the managers will respect the market valuations in making
investment decisions. The empirical studies supporting the managers' obedience to the stock market are Barro(1989) for the U.S. and Iwata(1990) and Takeda(1993) for Japan. Galeotti and Schiantarelli(1990) and Blanchard, Rhee, and Summers(1990) show the evidence that the fundamentals are as important as the non-fundamentals in the investment decision, but that the response of investment to the fundamentals is larger than that to the non-fundamentals. Morck, Shleifer, and Vishny(1990) give the evidence that the stock prices exert a significant effect on investment, but that the incremental explanatory power is only marginal.

9) We implicitly assume that the fundamentals are not so volatile as the stock price.

10) An alternative approach is to treat land also as the physical capital which has different types of adjustment costs. Under this specification, we can define the partial q for each physical capital, but it is unobservable. For applications of this multiple q, see Wildasin(1984), Chirinko(1986), Asako et al.(1989) and Hayashi and Inoue(1991).

11) Derivation of tax-adjusted average q can be found in many studies analyzing the investment behavior of the firm from the neoclassical viewpoint with adjustment costs. For example, see Blundell et al.(1992).

12) Abel and Blanchard(1986) and Ohtaki and Suzuki(1986) construct the series of marginal q based on the VAR model of underlying factors. Our approach is on the same track as them, although we take univariate approaches rather than multivariate ones.

13) See Yamamoto(1988) for the ADF test and Perron(1988) for the Phillips-Perron test.

14) It is assumed here that the error terms do not have MA parts.

15) We assume that the firm forms the static expectations for the future tax rates.

16) For more formal test, see Ogawa and Kitasaka(1994) where the cointegration relationship between the AVQ and the MAQ variables with the cointegration vector of $ (1,-1) $ is examined.

17) Low value of Durbin-Watson statistics hint that the AVQ variable is not cointegrated with the MAQ variable.

18) The adjustment cost function is specified as a quadratic form:
$$ G(I_{t},K_{t})=\left[b_{0}\left\{\left(\frac{I}{K}\right)_{t}-c\right\}+\frac{b_{1}}{2}\left\{\left(\frac{I}{K}\right)_{t}-c\right\}^{2}\right]K_{t} $$

For more detailed derivation of eq.(14), see Blundell et al.(1992).

19) Inclusion of the market value of land in the investment function is justifiable when the adjustment cost function is broadly defined so that it can incorporate the financial distress costs and the value of land as a collateral works as a factor to mitigate the financial distress cost. Similar formulation of the investment function is adopted by Devereux and Schiantarelli(1989) where an inclusion of the variables such as cash flow, liquid asset and debt level is justified.

20) Seasonal dummies are also employed as regressors.

21) Yonezawa(1989) and Iwamoto(1993) also point out that average q is a noisy signal of the future profitability of new investment projects.

(22) Once the cash flow variable is included in the investment equation, the MAQ variable loses its significance in construction, machinery, and electrical machinery industries. This is due to high collinearity between the cash flow and the MAQ variable. The cash flow variable can play two roles in the investment equations: one is a proxy of future profitability and the other is a mitigating factor of the borrowing constraints. It is expected that the former role is played by the MAQ variable in our formulation of the investment equation, but multicollinearity between the MAQ and the cash flow variables makes it difficult to disentangle two effects of the cash flow variable in estimation.

(23) One channel through which cash flow affects the demand for borrowing is via reduction of the agency cost. Another channel is a substitution of internal funds for borrowing. In general the sign of the cash flow variable in the borrowing equation is indeterminate and depends on the relative importance of the former channel to the latter.

(24) In a slightly different context Ueda and Yoshikawa(1986) demonstrate that average q cannot be a sufficient statistics of investment. Noting that the profit rates have more permanent components than the discount rates, they show that investment will be less responsive to financial factors such as stock prices.

25) See Iwamoto(1993) for a formal proof.
(26) Pindyck(1990) stresses the irreversible nature of investment due to sunk costs. He points out that investment becomes sensitive to the uncertainty with respect to future cash flow or interest rates when irreversibility of investment is taken into consideration.

27) For example see Gertler and Hubbard(1988) and Bernanke and Gertler(1989).

(28) Blanchard, Rhee, and Summers(1990) stresses this function of the stock market. They argue that the corporation will issue a large volume of shares when the market overprices the corporation and will invest the proceeds into the financial securities which do not require any additional cost in adjusting its level. Our conjecture is that this is the case for Japan in the middle to the latter half of 80's. They also argue that in the case where the fundamentals differ from the market valuations the reaction of the managers will hinge on what kind of shareholders the managers value most. If the managers act for the interests of short-term shareholders, then they will respect the market valuations, while if the managers side with the long-term shareholders, then they will act on the basis of their perceived fundamentals. Judging from the mutual holdings of shares among the corporations, it is likely that the latter will hold for Japan.
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Table 1

Characteristics of the Business Cycles in Japan (Boom Periods)

Period	GNP	Private Final Consumption	Private Gross Investment	Private Residential Investment	Private Capital Investment	Government Consumption	Exports etc.	Imports etc.	Unemployment Rate	GNP Deflator	TOPIX	Land Price Index of Six Largest Cities	Contracted Interest Rates on Loans	M2 + CD
1. 1958 June - 1961 Dec.	10.5	9.34	23.8	17.2	24.4	5.85	8.54	19.9	1.78	5.82	28.7	40.1	8.14	20.5
2. 1962 Oct. - 1964 Oct.	9.92	9.83	15.6	22.2	12.0	5.29	13.3	17.2	1.23	5.60	0.01	17.0	7.85	21.8
3. 1965 Oct. - 1970 July	10.5	8.95	17.5	16.4	16.6	4.02	18.5	14.6	1.21	5.50	14.4	9.53	7.45	16.7
4. 1971 Dec. - 1973 Nov.	8.08	9.06	10.7	16.7	8.33	5.35	6.28	17.3	1.35	9.29	48.4	24.3	7.08	23.4
5. 1975 March - 1977 Jan.	4.38	3.55	2.09	7.81	0.08	4.97	11.2	3.27	1.93	7.07	9.06	-1.93	8.56	14.3
6. 1977 Oct. - 1980 Feb.	5.25	5.61	6.20	1.61	7.66	4.59	5.84	8.92	2.14	3.70	8.48	6.58	6.48	11.6
7. 1983 Feb. - 1985 June	3.91	2.87	5.34	-3.22	6.24	2.82	9.95	4.08	2.67	1.89	23.4	5.72	6.85	7.66
8. 1986 Nov. - 1990 Oct.	5.05	4.51	11.7	10.1	11.6	1.66	10.3	16.6	2.46	1.12	19.3	26.3	5.51	10.8

Notes: The figures are average rates of change (in percentage terms) against the same quarter of a year earlier except unemployment rate and contracted interest rate on loans. The figures of unemployment rate and contracted interest rate on loans are percent.

The original data come from the data base in Economic Planning Agency.

Table 2

Characteristics of the Business Cycles in Japan (Recession Periods)

Period	GNP	Private Final Consumption	Private Gross Investment	Private Residential Investment	Private Capital Investment	Government Consumption	Exports etc.	Imports etc.	Unemployment Rate	GNP Deflator	TOPIX	Land Price Index of Six Largest Cities	Contracted Interest Rates on Loans	M2 + CD
1. 1961 Dec. - 1962 Oct.	8.99	7.61	8.95	15.5	10.4	7.55	16.1	-0.06	1.31	4.77	-14.1	32.1	8.23	17.8
2. 1964 Oct. - 1965 Oct.	8.68	8.30	11.6	23.6	5.98	3.05	22.2	10.2	1.19	5.33	-6.54	6.9	7.86	16.3
3. 1970 July - 1971 Dec.	4.70	5.45	1.34	5.14	1.88	5.37	16.9	9.43	1.20	6.12	6.73	23.8	7.62	19.8
4. 1973 Nov. - 1975 March (First Oil Crisis)	0.56	1.97	-5.77	-7.00	-5.72	5.24	13.3	-0.74	1.50	18.7	-13.9	4.7	9.09	12.9
5. 1977 Jan. - 1977 Oct.	4.76	4.07	-0.29	0.97	0.80	3.95	9.54	2.43	2.01	6.01	9.40	2.6	7.65	11.4
6. 1980 Feb. - 1983 Feb. (Second Oil Crisis)	3.30	2.51	1.37	-3.28	2.75	3.19	9.92	-1.04	2.24	3.29	7.23	8.7	7.84	8.76
7. 1985 June - 1986 Nov.	3.56	3.60	7.02	5.87	5.14	3.47	-2.65	-1.02	2.70	1.64	28.2	14.7	6.24	8.49
8. 1990 Oct. - 1993 Sep.	2.23	1.72	-1.30	-4.22	-0.27	2.40	2.89	-1.89	2.18	1.65	-13.5	-12.0	6.48	2.48

Notes: The figures are average rates of change (in percentage terms) against the same quarter of a year earlier except unemployment rate and contracted interest rate on loans. The figures of unemployment rate and contracted interest rate on loans are percent.

The original data come from the data base in Economic Planning Agency.
Table 3

Relationship between the Proportions of Collateral Loans and the Share of Small Enterprises in Loan Outstandings

Dependent Variables	CONST.	TOPIXHAT-1 x SMALL-1	PLANDHAT-1 x SMALL-1	SMALL-1	SCOL-1	LCOL-1	R² Durbin's h
SCOL	-0.0043 (-1.69)	0.0153 (2.90)	0.0109 (1.11)	0.9409 (4.28)	0.8843 -1.4806
LCOL	-0.1073 (-4.88)	0.0375 (1.15)	0.1786 (6.73)	1.0868 (20.32)	0.9757 -0.3506

Notes : The values in parentheses are t-values. $ R^{2} $ is adjusted coefficient of determination.
Table 4

Unit Root Test of Discount Factor and Profit Rate

Industry	Discount Factor	Profit Rates
ADF	PP	ADF	PP
all industries	-3.2	-3.3	-12.8	-35.0**
construction	-4.5	-6.7	-11.6	-61.2**
manufacturing	-4.3	-4.0	-13.3	-37.6**
food and beverages	-4.6	-6.9	-36.7**	-98.4**
textiles	-3.2	-7.0	-38.3**	-42.6**
pulp, paper, and paper products	-5.3	-5.2	-130.4**	-26.2*
chemicals	-5.6	-4.1	-11.6	-50.4**
steel	-2.8	-2.9	-28.2**	-38.4**
non-ferrous metal	-5.1	-4.7	-100.5**	-22.5*
fabricated metal products	-2.8	-5.1	-17.6	-38.7**
machinery	-5.0	-6.1	-9.3	-58.0**
electrical machinery	-5.0	-7.3	-11.1	-28.4**
wholesale and retail trade	-4.3	-5.1	-54.3**	-44.6**
real estate	-4.6	-9.0	-52.2**	-34.2**

Notes: (1) The figures in the column of ADF are the Augmented Dickey-Fuller statistics of $ T(\rho - 1) $ type. The figures in the column of PP are the Phillips-Perron statistics of $ T(\rho - 1) $ type.

(2) For a unit root test of discount factor constant term is included as a non-stochastic term, while for the case of profit rate the trend variable is included as well as constant term.

(3) ** means rejection of unit root test at the 1 % significance level.

* means rejection of unit root test at the 5 % significance level.