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What determines the Japanese firm investments: real or financial?

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In this article, I test both the real and the financial frictions in the Japanese firm investments using structural approach. The real represents the nonconvex capital adjustment costs, and the financial means the financing constraints. These two factors have been studied for a long time, but rarely analysed simultaneously. Through this analysis, I find the following results. First, both these two factors affect Japanese firm investments. Second, convex adjustment costs parameter is estimated at a very small level. Third, this small convex adjustment costs lead to the model introduced in Wang and Wen (2012), which insists that the firm investments are determined by the upper bound of the borrowing constraints.

Keywords: D21; G31; financing constraints; firm investments; nonconvex adjustment costs; structural estimation

Document Type: Research Article


Affiliations: Graduate School of Economics, Kyoto University, Kyoto, Japan

Publication date: January 22, 2014

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