second row of Table 3. Judging from the figures in Table 3, the firms in construction, steel, and real estate industries virtually face no borrowing constraints in the latter-half of the sample period.

To examine the effect of an increase of the land value or the cash flow on the degree of the borrowing constraints, we can calculate on the basis of the estimates of the Lagrangian multipliers by how much a trillion yen increase of land value or one hundred billion yen increase of cash flow lowers the effective discount rate. The results are summarized in Table 5.

As for the effect of a trillion yen increase of land value, it is equivalent to a fall of discount rate by 8.65, 6.36, and 0.29 percentage point for construction, steel, and wholesale and retail trade industries, respectively. When the cash flow increases by one hundred billion yen, the effective discount rate will decrease by 12.35, 3.49, and 1.93 percent point for construction, wholesale and retail trade, and real estate industries, respectively. The mitigating effects are especially large for non-manufacturing industries such as construction, wholesale and retail trade, and real estate. Note that these non-manufacturing industries are composed of more small-sized firms than the manufacturing industries. Table 6 shows the share of small-sized firms in each industry in terms of employment, and sales. In terms of the share of employees they are 95.4, 86.4, and 97.0 % in 1991 for construction, wholesale and retail trade, and real estate, respectively. As for the share of sales, they exceed 60 % for all non-manufacturing industries and are higher than the manufacturing average (51.8 %).

Our findings are consistent with the theoretical implications derived from the recent literature on the investment behavior under the asymmetric information between the creditors and debtors. Some interpretations to our results are now in order from the viewpoint of the asymmetric information. It is quite plausible to assume that the firm as a borrower has superior information on the investment projects to be undertaken to lenders. Furthermore the lenders cannot monitor the behavior of the borrowers perfectly without incurring additional costs. In those situations the optimal financial arrangements will be made between the lenders and the borrowers that include the clauses that prevent the borrowers from taking actions disadvantageous to the lenders. Moreover it is demonstrated that the level of investment by the firms becomes inefficient compared to that without any informational friction due to the costs arising from the financial arrangements.

This cost drives the wedge between the cost of internal funds and that of the external funds, which corresponds to the Lagrangian multiplier or the risk premium added on to the nominal discount rate in our context. The cost of internal funds is cheaper than that of external funds, but the abundance of internal funds (cash flow) or the high market value of land as a collateral helps to narrow the gap between the internal cost and the external cost, which in turn induces the firms to undertake more investment projects.

The explanations above will be more applicable to small-sized firms in Japan since most of them do not have close ties with the banks. It is well-known that in Japan there are industry groups called keiretsu. The firms belonging to industry groups are relatively free from the problem of