Borrowing constraints and the role of land asset in Japanese corporate investment decision

This study examines whether Japanese firms face borrowing constraints in investment decision. We find that the Euler equation derived from intertemporal maximization is violated in most of the industries when borrowing constraints are not properly taken into consideration. We also parameterize the Lagrangian multiplier attached to the borrowing constraints as a function of land assets or cash flow of the firm and evaluate the extent to which the borrowing constraints are prevalent. The borrowing constraints are notably severe for industries with many small firms, which is consistent with the literature that stresses asymmetric information of business cycles. (C) 1996 Academic Press, Inc.