Fist, we examine financing and investment patterns to gauge firms' reactions to the 1980s stock market run-up. Second, we test subsets of the orthogonality conditions associated with the empirical first-order conditions for fixed investment. Third, we use a linear projection to decompose stock market prices into fundamental and bubble components, allowing us to carry out parametric estimates of the effect of the bubble component on fixed investment. The data strongly suggest that there was a bubble that had an economically important statistically significant effect on business fixed investment in Japan. We would like to thank Lu Dayrit, Mimi Emory, Hitoshi Izumi, Takeshi Kimura, Kazuo Ueda, Eugene White, and seminar participants at Rutgers University for helpful comments and David Price for timely research assistance.
Any errors are our own.