investment decision we can find another new channel through which the asset market affects the corporate investment.

We examine whether the firm faces the borrowing constraints in determining the investment level by estimating the first order conditions of the firm derived from the intertemporal maximization problem. The generalized method of moments estimation (GMM) is employed in estimating the first order conditions. $ ^{4} $ Our approach has some advantages over the traditional way of estimating reduced-form type investment demand equations. In the typical specification of the reduced-form investment functions, a proxy for future profitability relative to investment cost plays a central role among explanatory variables. $ ^{5} $ When the stock market reflects all the relevant information concerning the future profitability of investment, then Tobin's average q, a ratio of the value of the firm evaluated in the financial markets to the replacement value of capital stock, is a sufficient statistics for investment. This approach seems quite appealing since no explicit formulation of future expectations is necessary. However this efficiency assumption of the stock market has been often criticized since the stock price might contain not only the fundamental parts but also the noise uncorrelated with the fundamentals. Then the stock price does not function well in allocating the funds to prospective investment projects in an efficient manner. In fact our first paper gives evidence that the stock prices in Japan were contaminated by the noise in the middle to late 1980's and that investment responded differently to the fundamental components and to the noise components.

Marginal q is another candidate to represent the future profitability of investment. Indeed it is free from the implicit assumption of the stock market efficiency underlying the average q, but explicit specification of the future profitability and the discount factor is inevitable. Some kind of arbitrariness always slips in when we specify the stochastic process of them and it will affect the constructed series of marginal q.

Direct estimation of the intertemporal first-order conditions by the GMM has no drawbacks stated above and it has the virtue that we can conduct a formal test of the borrowing constraints. Our study is based on the quarterly data reported in the Quarterly Report of Financial Statements of Incorporated Business (abbreviated as QRFS) compiled by the Ministry of Finance. The QRFS is the only data source from which we can construct a quarterly series of land stock. Fourteen industries are chosen as our sample: all industries, construction, manufacturing, food and beverages, textiles, pulp, paper and paper products, chemicals, steel, non-ferrous metal, fabricated metal products, machinery, electrical machinery, wholesale and retail trade, and real estate. The sample period for estimation covers from the second quarter of 1970 to the third quarter of 1990 (82 observations).

Our findings are summarized as follows: We could detect the existence of borrowing constraints in half of the industries: all industries, construction, manufacturing, food and beverages, chemicals, steel, and wholesale and retail trade industries. Moreover it is found that the degree of borrowing constraints depends on the asset value of land or the cash flow. Specifically the value of