Is Cash Flow a Proxy for Financing Constraints in the Investment Equation? The Case of Unlisted Japanese Firms

The literature maintains the statistical significance of cash flow in the investment equation. One criticism against the financing constraint interpretation of cash flow is that cash flow may be picking up information on the future profitability of a firm which Tobinfs Q fails to capture. We confine ourselves to the investment behavior of unlisted automobile parts suppliers, and use the sales of large automobile makers as an exogenous instrument. Despite the various criticisms against the financing constraint interpretation of cash flow, our statistical evidence does not disagree with the hypothesis.Tobinfs Q, Investment Equation, Cash Flow, Financing Constraint, Japanese Unlisted Firms

THE SIGMOIDAL INVESTMENT FUNCTION

Based on the investment theory of Abel and Eberly (1994), we develop an analytical model of adjustment costs, which produces a sigmoidal investment function. We also estimate the piecewise linear investment function, which includes as special cases linear models, models with one threshold, the original model of Abel and Eberly, which has two thresholds, and sigmoidal models. Empirical evidence clearly supports the sigmoidal model. The threshold estimate of Tobinfs q is 0.91. The investment ratio does not respond at value of Tobinfs q below 0.91, but begins to react sensitively as Tobinfs q passes 0.91.Tobinfs q, financial constraints, irreversibility of investment, unlisted, Japanese firms, piecewise linear function

AN INJECTION OF BASE MONEY AT ZERO INTEREST RATES: EMPIRICAL EVIDENCE FROM THE JAPANESE EXPERIENCE 2001-2006

Many macroeconomists and policymakers have debated the effectiveness of the quantitative monetary-easing policy (QMEP) that was introduced in Japan in 2001. This paper measures the effect of the QMEP on aggregate output and prices, and examines its transmission mechanism, based on the vector autoregressive (VAR) methodology. To ascertain the transmission mechanism, we include several financial market variables in the VAR system. The results show that the QMEP increased aggregate output through the stock price channel. This evidence suggests that further injection of base money is effective even when short-term nominal interest rates are at zero.Quantitative easing; Money injection; Portfolio rebalancing; Stock price channel; Vector autoregression