INFORMATION, INVESTMENT, AND THE STOCK MARKET: A STUDY OF INVESTMENT REVISION DATA OF JAPANESE MANUFACTURING INDUSTRIES

Transcription

1 Discussion Paper No. 681 INFORMATION, INVESTMENT, AND THE STOCK MARKET: A STUDY OF INVESTMENT REVISION DATA OF JAPANESE MANUFACTURING INDUSTRIES Kazuo Ogawa and Kazuyuki Suzuki January 2007 The Insiue of Socia and Economic Research Osaka Universiy 6-1 Mihogaoka, Ibaraki, Osaka , Japan

2 Discussion Paper No. 681 INFORMATION, INVESTMENT, AND THE STOCK MARKET: A STUDY OF INVESTMENT REVISION DATA OF JAPANESE MANUFACTURING INDUSTRIES Kazuo Ogawa and Kazuyuki Suzuki January 2007 The Insiue of Socia and Economic Research Osaka Universiy 6-1 Mihogaoka, Ibaraki, Osaka , Japan

3 Augus 2006 Firs Revision December 2006 Informaion, Invesmen, and he Sock Marke: A Sudy of Invesmen Revision Daa of Japanese Manufacuring Indusries* Kazuo Ogawa Insiue of Socia and Economic Research Osaka Universiy Kazuyuki Suzuki Schoo of Commerce Meii Universiy * The auhors are graefu o Kazumi Asako, Shin-ichi Fukuda, Masaharu Hanazaki, Hideo Hayakawa, Saoshi Kawanishi, Junichi Nakamura, Yuaka Soeima, Waaru Takahashi, Fukuu Yamasaki, and paricipans of he seminars a he Bank of Japan and Deveopmen Bank of Japan for exremey vauabe commens and suggesions on an earier version of he paper. This research is pariay suppored by Gran-in-Aid for Scienific research (# ) from he Japanese Minisry of Educaion, Cuure, Spors, Science and Technoogy in 2004 o Any remaining errors are he soe responsibiiy of he auhors.

4 Absrac We examined invesmen behavior in he Japanese manufacuring indusry using invesmen revision daa o anayze invesmen behavior from a fresh ange. We esed he maringae invesmen hypohesis and hen he q-heory of invesmen by ooking a he response of sock reurn and invesmen o news arriving a firms. The maringae hypohesis was generay acceped, and we aso found evidence for he vaidiy of he q-heory hypohesis. Invesmen was responsive o profi rae revision and saes revision, bu sock reurn responded ony o profi rae revision. Furher invesigaion reveaed ha invesmen was aso moivaed by expansion of marke share for saes, especiay for indusries wih rapid echnoogica progress. JEL Cassificaion Number: E-22, E-44 Keywords: Invesmen revision, maringae, sock reurn, q heory, marke share, fexibe acceeraor heory Correspondence o: Kazuo Ogawa Insiue of Socia and Economic Research, Osaka Universiy, 6-1 Mihogaoka, Ibaraki, Osaka, JAPAN Te: Fax: E-mai: ogawa@iser.osaka-u.ac.p 1

5 1. Inroducion Curren fixed invesmen, added o capia sock, conribues o fuure producion aciviies. Thus fuure prospecs of oupu markes as we as producion facor markers are of paramoun imporance in deermining invesmen. Ahough he imporance of expecaions wih respec o invesmen aciviies has been we recognized, here have been very few sudies ha have acked direcy how incoming informaion makes firms change heir expecaions and hus revise heir invesmen pans. This is mainy because expecaion is inrinsicay unobservabe and researchers have o somehow specify he sochasic process driving he basic facors of invesmen. Under he assumpion ha he firm s opima invesmen pan is deermined by maximizing is firm vaue, one ingenious bypass o avoid handing expecaions is he use of sock marke informaion for conveying a of he informaion ha is reevan for invesmen. Tha is, he fuure profiabiiy of he invesmen is summarized ino one variabe, Tobin s q. 1 Appeaing as his heory is, empirica work is no necessariy supporive of he posiive reaionship beween invesmen and he sock marke. 2 In his sudy we examined how new informaion is uiized in revising invesmen pans in Japanese manufacuring indusries. A new feaure of our sudy is he use of invesmen revision daa in he Shor-erm Economic Survey of Enerprises in Japan (Tankan), compied by he Bank of Japan, wihou imposing any assumpions on a prior expecaion formaion by firms. By regressing invesmen revision based on incoming informaion, we may discover how firms revise heir invesmen in response o incoming informaion. Moreover, under he raiona expecaion hypohesis, invesmen refecs a of he informaion avaiabe o he firm ha is reevan o he fuure prospecs of oupu markes as we as inpu facor markes. I impies ha invesmen revision is a maringae, as is shown beow. The maringae propery of invesmen is in ine wih ha of consumpion originay derived by Ha (1978) from he permanen income hypohesis. We can es his maringae hypohesis using invesmen revision daa. Our approach has anoher advanage in ha we can es he we-ceebraed q-heory of invesmen by examining simuaneousy he response of sock price, as we as invesmen, o incoming informaion. 2

6 Our main findings are as foows: Firs, on he whoe, firms make heir invesmen pans by fuy expoiing a avaiabe informaion, in he sense ha he informaion avaiabe before he revision dae has no expanaory power in predicing invesmen revision. Second, invesmen revision and sock reurn are significany affeced by a revision of he profi rae. This migh expain he posiive correaion beween invesmen and sock reurn. Third, once saes revision is aken ino consideraion, invesmen revision is more responsive o saes revision han is profi revision. However, sock reurn does no respond o saes revision, which impies ha he reaionship beween invesmen and sock reurn is no sabe. Raher, our evidence suggess ha aenion shoud aso be paid o he marke share aspec of he invesmen decision, as invesmen is pary driven by he firm s desire o expand is marke share for saes. This paper is organized as foows: In Secion 2, afer a brief expanaion of a heoreica idea underying our empirica work, we specify equaions o be esimaed ha associae invesmen revision wih incoming news. We aso se up a framework o es he q-heory of invesmen. Secion 3 describes our daa on invesmen revision. Secion 4 shows empirica resus and discusses heir impicaions. Secion 5 concudes his sudy. 2. Invesmen Revision and Incoming News: Theory and Empirica Sraegy Invesmen revision and maringae I is a genera principe ha he opima invesmen of a firm is deermined by inerempora opimizaion. The obecive funcion of he firm and he consrains are no specified a his ime. The opima invesmen in he period ( I ) is wrien as a funcion of he informaion avaiabe o he firm in he period, denoed by Ω. I ( Ω ) = f (1) Suppose ha a firm makes is firs invesmen pan for period in he period sub-period, 1. For exampe, he period corresponds o he year and he sub-period corresponds o a quarer. We assume ha he invesmen pan is revised in he subsequen sub-periods, 2, 3, L k of period. Tha is, he invesmen is revised k-1 imes in period before he invesmen pan is finay maeriaized. Figure 1 shows he process of invesmen revision 3

7 in period uni a fina deerminaion of he pan is made. We denoed he invesmen pan for period in sub-period by I,. Under a raiona expecaion assumpion, he invesmen pan repored by he firm is a mahemaica expecaion ha is condiiona on he informaion se ( Ω ) avaiabe o he firm in sub-period, or I [ I Ω ], = E (2) The expeced growh rae of invesmen for period based on Ω is given by I, I G = Ω, E (3) I 1 I 1 The invesmen pan is revised by incoming informaion, so ha he revision of he invesmen growh rae beween and ( > ), denoed by RG,, is wrien as I I,, I I RG = Ω Ω, E E (4) I 1 I 1 I 1 I 1 Because no informaion is os, or Ω Ω, [ RG, ] = 0 E (5) Ω Equaion (5) impies ha he revision of he invesmen growh rae beween and is a maringae. 3 The revision of he invesmen growh rae beween and is driven by he informaion arriving beween he sub-period and, bu no variabe in he informaion se Ω can predic he revision of he invesmen growh rae beween and. Specificay, we assumed ha he revision of he invesmen growh rae beween and 4

8 is a inear funcion of he informaion arriving beween he sub-period and. m RG, = α ixi,, (6) where i= 1 x i,, : i-h informaion arriving beween he sub-period and x i,, Ω Ω When he variabes in he informaion se Ω were added o he expanaory variabes in Equaion (6), he corresponding coefficien esimaes shoud be oiny zero. Tha is, m n RG, = ixi,, + βi yi, i= 1 i= 1 where y i, α (7) Ω The es of maringae hypohesis is reduced o he es of he nu hypohesis, ha β β = L β 0, in Equaion (7). 1 = 2 n = Invesmen and sock reurn Now, we wi be more specific abou he obecive funcion of he firm. The sandard assumpion in he invesmen ieraure is ha of vaue maximizaion. I is we known ha Tobin s q, raio of firm vaue o he repacemen vaue of capia sock, is a sufficien invesmen saisic. The impicaions for he reaionship beween invesmen revision and sock price are sraighforward. The firm revises he invesmen pan in response o any informaion ha affecs is firm vaue. Accordingy, he sock price aso responds o he same informaion. Le z, be informaion arriving beween he sub-period and ha affecs he invesmen pan. Excess sock reurn beween he sub-period and ( R, ) is aso affeced by z,. 4 From he above discussion we can derive an invesmen funcion ha has sock reurn as an expanaory variabe. Boh invesmen revision and sock reurn consiue a funcion of common informaion,, or z, 5

9 RG, a0 + a1z, + v, = (8) R, b0 + b1 z, + ε, where = (9) v, : measuremen error of invesmen growh rae uncorreaed wih z, ε, : oher facors, uncorreaed wih z, a 1 > 0, b 1 > 0 affec sock reurn and invesmen revision, ha Eiminaing z, from Equaions (8) and (9), we obain a a a = ε (10) RG, a 0 + R,, + v, b1 b1 b1 Equaion (10) saes ha he revision of invesmen growh rae is posiivey correaed wih sock reurn. However, an esimaion of Equaion (10) by ordinary eas squares (OLS) yieds a biased esimae of he sock reurn coefficien because sock reurn is correaed wih he composie error erm. Because sock reurn is negaivey correaed wih he error erm, we wi have a downward biased esimae. The above argumen iusraes why we ofen obain a weak posiive or someimes a negaive reaionship beween sock reurn and invesmen in empirica sudies. 5 6 We wi show ha his is exacy he case for our daa se in Secion Daa Descripion of Invesmen Revision The Shor-erm Economic Survey of Enerprises, caed TANKAN, is a quarery survey of enerprises conduced by he Bank of Japan o provide an accurae picure of business rends in Japan. In he survey, responding enerprises are asked o provide annua forecass for severa iems ha incude fixed invesmen. 7 Sampe aggregaes by indusry and firm size are reeased as a proeced year-o-year percenage change in invesmen. The survey is conduced quarery in March, June, Sepember, and December. The survey resus are reeased a he beginning of Apri, Juy, Ocober, and in mid-december. The 6

10 annua invesmen proecion for a cerain fisca year is firs reeased in March of he previous fisca year, and is revised five imes, in June, Sepember, December, March, and June of he foowing fisca year, when he fina figure is seed. Therefore, we can cacuae he revision of he proeced invesmen growh rae five imes. There is, however, a cavea. In he firs survey conduced in March of he previous fisca year, he denominaor in cacuaing growh rae is no a fina one, and hus he invesmen revision from March o June refecs no ony he change in proeced annua invesmen (numeraor) bu aso a change in he denominaor. Thus, he invesmen revision from March of he previous fisca year o June is no comparabe o oher revisions. Furhermore, he revision from March o June of he foowing fisca year is a kind of ex-pos revision and differs in naure from oher revisions. Therefore, we used hree of he revision series of annua invesmen growh rae: hose from June o Sepember, from Sepember o December, and from December o Mach. The sampe period covers from 1975 FY o 2002 FY. 8 We used ony invesmen revision daa from arge enerprises because mos of he medium-sized and sma enerprises are no ised. Noe ha an examinaion of he reaionship beween invesmen and sock reurn is vaid as ong as he enerprises are ised. 9 In regression anaysis, we pooed ime series daa across indusries o increase observaions. We used 12 manufacuring indusries: exies; pup and paper; peroeum and coa producs; ceramics, sone, and cay; iron and see; non-ferrous meas; food and beverages; processed meas; indusria machinery; eecrica machinery; and ransporaion machinery and precision machinery. Figure 2 shows he annua proecion of he invesmen growh rae of manufacuring as a whoe for 1975 FY 2000 FY, every five years. The five figures are annua proecions made in June, Sepember, December, March, and June in he foowing fisca year, respecivey. I appears ha he annua proecion is revised upward in Sepember and December and hen sighy revised downward afer December, excep for 1975 FY and 1985 FY. The Bank of Japan expains his paern as foows: In he eary sage of invesmen panning new pans become concree and he pans ha were unfinished in he previous fisca year are added. This eads o an upward revision of invesmen pan. However, deays in consrucion and he posponemen of pans are observed a he ae 7

11 sage of invesmen panning, which eads o downward revision of pans. If his is he case, hen he invesmen revision migh no be a maringae in he rigorous sense. We wi examine his in deai in he nex secion. 4. Esimaion Resus and Their Impicaions Incoming informaion and invesmen revision We examined how he proecion of annua invesmen growh rae is revised by incoming news. We regressed a revision of he proeced annua invesmen growh rae (REVINV) on he variabes ha represen incoming news. The TANKAN survey aso coecs usefu informaion on incoming news. This informaion consiss of a proecion of he profi rae, measured by he raio of curren profi o saes, and he saes growh rae. Thus a revision of profi rae (REVPROFIT) and of he saes growh rae (REVSALE) are readiy cacuaed. Noe ha REVPROFIT and REVSALE are a revision of he proeced annua profi rae and saes growh rae, respecivey, simiar o he definiion of he REVINV variabe. Regression anaysis was conduced separaey for hree revision daes (June Sepember, Sepember December, and December March), because he response of invesmen o arriving news wi depend on he sage of invesmen panning. The response migh be weaker a he eary sage of he invesmen pan because firms can easiy change an invesmen pan a a aer sage. As he invesmen pan ges maeriaized, he firms migh be more responsive o incoming news. By pooing ime-series daa across he 12 indusries, we esimaed he invesmen revision equaion by OLS. The indusry effecs were aken ino consideraion by means of indusry dummies. For he regression of he Sepember December and December March revision daa, we added he agged revision o examine he persisency of he invesmen proecion. When a maringae is hed rigorousy, we expec ha he curren revision is no affeced by he agged revision. 10 Esimaion resus of regressing REVINV on REVPROFIT and REVSALE are shown in Tabe A revision of boh he profi rae and he saes growh rae had significany posiive effecs on he revision of he invesmen growh rae for a of he revision daes, if used aone. An upward revision of 8

12 he profi rae by 1% raises he revision of he invesmen growh rae by 3 4% poins, whie an upward revision of he saes growh rae eads o an approximae 0.6%-poin upward revision of he invesmen growh rae. However, when a revision of boh he profi rae and he saes growh rae are aken ino consideraion simuaneousy, he revision of he profi rae is no onger significan for he December March revision, whie he revision of he saes growh rae remains significan a he 1% eve for a of he revision daes. Surprisingy, a agged invesmen revision had a significan effec on curren invesmen revision. In he Sepember December revision, agged invesmen had posiive effecs, whie in he December March revision i had negaive effecs. This resu confirmed saisicay he persisence of he proecion of he annua invesmen growh rae, as seen in Figure 2. This suggess ha he maringae hypohesis was no hed rigorousy. We exended our anaysis by adding more variabes represening arriving news o he wo basic revision variabes used above. We consruced variabes represening incoming news by VAR. Specificay, we esimaed he foowing six-variabe VAR sysem on quarery daa for 1975 FY 2002 FY. The variabes we used were he rae of change in he corporae goods price index reaive o he invesmen goods price and saes. In addiion, we used sock reurns and he change in he average variabe cos, measured by saes cos divided by saes, he borrowing ineres rae and diffusion index of ending aiude of financia insiuions. 12 Noe ha a of he variabes used in he VAR anaysis are quarery reaized vaues, no revisions of annua proecions. They are seasonay unadused, so we aso added seasona dummies. A six-variabe VAR is esimaed for each indusry and we defined he incoming news variabe as a one-period-ahead forecas error. In regression anaysis, we used four variabes of incoming news. They were forecas errors of he rae of change in corporae goods price reaive o invesmen goods price (REVPRICE), he change in he average variabe cos (REVAVECOST), he borrowing ineres rae (REVINT), and he diffusion index of ending aiude of financia insiuions (REVLEND). The regression resus are shown in Tabe 2. The REVAVECOST variabe was significan. Shock of he rae of change in he average variabe cos exered significan posiive effecs on he June Sepember and 9

13 December March invesmen revision. The average variabe cos refecs he capaciy uiizaion rae, so i is quie egiimae o sugges ha invesmen is revised upward when he rae of change in he average variabe cos increases. Noe ha he revision of he profi rae ceases o be significan for he Sepember December and he December March revision dae, whie he revision of he saes growh rae remains significany posiive for every revision dae. This suggess ha he revision of he saes growh rae is more imporan han ha of he profi rae in revising he invesmen growh rae. Nex, we conduced he maringae es by adding variabes avaiabe for he firm when he iniia proecion of he invesmen growh rae is made. Because we aready knew ha he agged invesmen revision was a significan expanaory variabe, our es was condiiona on he persisence of he invesmen revision. We added he foowing five variabes and esed he nu hypohesis ha he corresponding coefficiens were oiny zero. The variabes we considered were he firs ag of he rae of change in he corporae goods price index reaive o he invesmen goods price and he change in average variabe cos, he borrowing ineres rae and diffusion index of he ending aiude, and he sock reurn. The es saisics are shown in Tabe 3. The nu hypohesis was no reeced a he conveniona significance eve for he June Sepember and he December March revision and i was no reeced a he 1% significance eve for he Sepember December revision. 13 I woud be fair o say ha he maringae hypohesis was condiiona on he persisence of he invesmen revision. Sock marke and invesmen revision As was discussed in Secion 2, we expeced o observe co-movemen of invesmen revision and sock reurn in vaue-maximizing firms when hey are driven by he same facors. In his secion we examine he reaionship beween he revision of he invesmen growh rae and he sock reurn. Firs we regressed he quarery sock reurn on he wo basic variabes used in he invesmen revision regression: he revision of he profi rae and he saes growh rae. The quarery sock reurn was cacuaed as foows: he sock price index quoed in he Tokyo Sock Exchange, avaiabe monhy by indusry. We firs 10

14 cacuaed he quarery average of he sock price index, and hen we cacuaed he quarery sock reurn for each indusry as he rae of change in he quarery sock price. 14 Tabe 4 shows he regression resus of he quarery sock reurn on he wo revision variabes. 15 Revision of boh he profi rae and he saes growh rae had significany posiive effecs on sock reurn, excep in he December March period, when i was used aone. The expanaory power of he saes growh revision was much ower han ha of he profi rae. The adused R-squared ranged from o 0.04 for he saes growh revision, whie i ranged from o 0.14 for he profi rae revision. When boh revision variabes were aken ino consideraion a he same ime, he revision of he profi rae remained significan bu ha of he saes growh rae os is significance. I appeared ha he sock reurn was driven by new informaion associaed wih he profi rae. 16 This evidence is in accord wih he q-ype invesmen heory. In secion 2 we saed ha he OLS esimaion of he reaionship beween invesmen revision and sock reurn shoud ead o a downward biased esimae. Tabe 5 shows he regression resus of invesmen revision on sock reurn. 17 The firs coumn of each revision dae shows he esimaion resus by OLS. Sock reurn had a significany posiive coefficien ony in he June Sepember revision period. The second coumn of each revision dae shows he esimaion resus from he insrumena variabe (IV) mehod, o correc possibe correaion beween sock reurn and he error erm. We used he agged sock reurn as he insrumen. In his case, he sock reurn had significany posiive coefficiens in a of he revision daes. Furhermore, he coefficien esimaes from he IV mehod were much arger han hose from OLS. This is exacy he case discussed in Secion 2, and i indicaes ha boh he invesmen revision and sock reurn were driven by he same facor: revision of he profi facor. However, he sock reurn was aso affeced by oher facors uncorreaed wih invesmen revision. We exended his anaysis by adding more expanaory variabes. Firs, we added a revision of he saes growh rae in he invesmen revision equaion. The hird coumn of each revision dae in Tabe 5 shows he esimaion resus from he IV mehod. A agged sock reurn was used for he insrumen for he curren sock reurn. The coefficien esimae of sock reurn go smaer, and hey were barey significan for he 11

15 June Sepember and December March revision daes. However, he coefficien esimae of he sock reurn was no onger significan for he Sepember December revision dae. In he second exension we added four one-period forecas errors cacuaed from he VAR anaysis above, as we as he saes growh revision, as expanaory variabes. Esimaion resus by he IV mehod are shown in Tabe 6. Sock reurn si exered a posiive effec on he invesmen revision, bu i was significan ony for he June Sepember revision dae. However, he effecs of saes growh revision on invesmen revision remained significany posiive for a of he revision daes. In summary, a revision of he profi rae affeced boh he invesmen revision and sock reurn, bu once he revision of he saes growh rae was aken ino accoun, he profi rae revision variabe os is significance in he invesmen revision equaion, ahough i remained significan in he sock reurn equaion. The q-heory predics ha he sock reurn wi respond in he same direcion o he informaion ha affecs invesmen revision, which is no necessariy suppored by our esimaion resus. There are severa inerpreaions of our resus. Firs, i is possibe ha he q-heory wi keep is vaidiy in expaining invesmen behavior once he perfec compeiive assumpion of produc marke underying he q-heory is reaxed. When a firm faces a downward demand curve, he average q conains no ony he margina profiabiiy of he invesmen (margina q) bu aso he monopoy ren of he firm, which, in urn, is affeced by saes growh. Schianarei and Geogousos (1990) and Gaeoi and Schianarei (1991) formay demonsraed ha he oupu variabe eners q-ype invesmen funcions wih a negaive sign. Conrary o he heoreica predicion, we observed a posiive correaion beween curren invesmen revision and curren saes growh revision. 18 Secondy, our evidence was aso consisen wih a fexibe acceeraor mode of invesmen, where saes are he mos imporan facor in deermining invesmen. Abe and Banchard (1988) rebui he radiiona fexibe acceeraor mode in an inerempora conex. Taking fuure saes as a given, hey derived an opima invesmen rue by minimizing he producion cos in combinaion wih he adusmen cos of invesmen. Invesmen narrowed he gap beween opima capia sock and he iniia exising capia sock. Opima capia sock is defined as he presen discouned vaue of expeced fuure 12

16 saes. When he firm obains informaion ha is usefu for revising fuure saes growh, he firm wi expoi ha informaion and revise he opima capia sock accordingy. Thus, he invesmen pan wi aso be revised. As appeaing as his heory is, more empirica work is needed o suppor i. Specificay, we need o conduc a direc es by esimaing he Euer equaion of he invesmen derived from inerempora cos minimizaion. Thirdy, i has been frequeny assered ha he invesmen of Japanese firms is moivaed by growh consideraions, in addiion o profi maximizaion. The Deveopmen Bank of Japan conduced an ineresing survey on invesmen in 1999, reeased as he Corporae Invesmen Aiude Survey in The Deveopmen Bank of Japan (1999). This survey covered 3302 companies whose equiy capia is one biion yen or more and was designed o eucidae he presen condiion of, and change in, invesmen behavior. The survey asked he foowing quesion o he firms invoved: Has he mainenance and expansion of marke share for saes been a driving force of invesmen acceeraion in he 80s, and in he 90s? Eighy-wo percen of he respondens in manufacuring indusries answered yes for invesmen acceeraion in he 80s and 64% for invesmen acceeraion in he 90s. This iusraes he imporance of marke share consideraions in undersanding he invesmen behavior of Japanese firms. 19 This wi be especiay rue for firms in indusries wih rapid echnoogica progress, because invesmen in hese indusries wi embody new echnoogy; herefore, hose firms ha do no increase invesmen in response o increasing demand wi no benefi from new echnoogy and wi evenuay ose heir compeiive edge. 20 If his inerpreaion is vaid, invesmen revision in indusries wih rapid echnoogica progress wi be more responsive o saes revision. To es his conecure, we compared he response of invesmen revision o saes growh revision in indusries wih high and ow echnoogica progress. Specificay, we consruced he indusry dummy for machinery indusries ha are expeced o have high echnoogica progress and added he cross erm of he indusry dummy wih saes growh revision in he invesmen revision equaions. 21 Tabe 7 shows he esimaion resus. The cross erm was significany posiive for a of he revision daes, irrespecive of he specificaion of he invesmen equaions. 22 I 13

17 impies ha he invesmen revision is much more responsive o he revision of saes growh for indusries wih rapid echnoogica progress. This ends empirica suppor o our hird inerpreaion, ha mainenance or expansion of marke share for saes is a maor concern informing he invesmen decisions of firms. 5. Concuding Remarks This sudy examined he invesmen behavior of Japanese manufacuring indusries based on invesmen revision daa. Use of invesmen revision daa enabed us o shed igh on invesmen behavior from differen anges. Firs, we esed he maringae hypohesis of invesmen, which says ha informaion is uiized efficieny in panning invesmens. Second, we examined he q-heory of invesmen by ooking simuaneousy a he response of sock reurn and invesmen o incoming news. We found ha he maringae hypohesis is generay acceped, in he sense ha he informaion avaiabe o a firm prior o heir invesmen revision does no affec he invesmen revision, ahough we observed some persisence of invesmen revision. We aso found evidence favorabe o he q-heory. Tha is, boh sock reurn and invesmen revision respond in he same direcion o a revision of he profi rae. However, once he revision of saes growh rae is aken ino consideraion, invesmen is responsive o saes revision, bu sock reurn is no. Our evidence hins ha he q-heory aone is no sufficien o expain he invesmen behavior of Japanese manufacuring firms. One possibe approach, hen, woud be o ake accoun of he marke share aspec in invesmen decisions. This is especiay usefu in expaining he invesmen behavior of machinery indusries characerized by rapid echnoogica progress. More invesigaion ino a firm s invesmen moivaion, consisen wih observed invesmen aciviies, woud consiue a promising avenue for fuure research. 14

18 Foonoes 1 For semina work on Tobin s q, see Tobin (1969) and Hayashi (1982). 2 There are numerous sudies on he reaionship beween he sock marke and invesmen. For exampe, see Barro (1990), Morck e a. (1990), Banchard e a. (1993), and Lamon (2000). 3 Schankerman (2002) was he firs o demonsrae ha invesmen revision is a maringae. 4 For forma discussion see Pakes (1985) and Schankerman (2002). 5 See Lamon (2000) for anoher reason why we observe a negaive correaion beween sock reurn and invesmen. 6 I is sraighforward o exend he one variabe case above o a muipe variabes case, o obain he reaionship beween sock reurn and invesmen. 7 Fixed invesmen is defined as he amoun of newy ised angibe fixed asses incuding new and purchase expenses. Noe ha i incudes he amoun newy appropriaed in ongoing consrucion, bu excudes he amoun ransferred from in-progress consrucion o propery, pans, and equipmen. 8 TANKAN survey has been revised from he March 2004 survey, so ha our sampe period covers up o 2002 FY o mainain coninuiy of he daa series.. 9 Large enerprises are defined as hose wih 1000 empoyees or more. 10 For he June Sepember revision regression we do no add he agged revision because he March June revision is conaminaed by he fina invesmen updae in he previous year, as noed in Secion The proecion of he profi rae in he June survey is ony avaiabe afer 1984, so he number of observaions in he June Sepember invesmen revision regression is ess han in he oher regressions. 12 The variabes of saes, saes cos, and borrowing ineres rae were aken from Financia Saemen Saisics of Corporaions by he Minisry of Finance. They are avaiabe by indusry and by firm size, and measured by equiy capia. Our figures are hose of arge corporaions whose equiy capia is more han one biion yen. The Bank of Japan compies daa on corporae goods price and he diffusion index of ending aiude of financia insiuions, which is aken from he Shor-erm Economic Survey of Enerprises. 13 The maringae es was aso conduced for he case wihou agged invesmen revisions as expanaory variabes. The es saisics were 2.26 and 1.23 for he Sepember December and he December March revision, respecivey, and he es resus in he ex remained unaered. 14 I woud be idea o use excess sock reurn raher han sock reurn per se. However, quarery reurn of he appropriae safe asse o be subraced from he sock reurn was no avaiabe, so we used sock reurns. Our approach is usified as ong as he reurn of riskess asse is consan over ime. 15 Indusry dummies are aso used as regressors. 16 Our evidence, ha profi rae revision is more usefu in predicing sock reurn, remained unaered even when we added residua variabes consruced from he VAR anaysis above as expanaory variabes. 15

19 17 Indusry dummies as we as agged invesmen revision are aso expanaory variabes. 18 See aso Lindenberg and Ross (1981) and Ogawa and Kiasaka (1999) for he associaion of monopoy ren wih average q and invesmen. 19 Deveopmen Bank of Japan (2001) esimaed invesmen equaions wih quaiaive survey resus as an expanaory variabe, using a pane daa se. They found ha he invesmen rae of he firms ha inked mainenance and expansion of marke share for saes wih invesmen acceeraion was significany higher. 20 I has aso been argued, from he sandpoin of R&D invesmen, ha he fracion of R&D expendiure, considered as a fixed cos, is high for machinery indusries and, as saes increase, he cos burden of R&D expendiure decreases, which induces he firms in machinery indusries o expand marke share. 21 Machinery indusries cover he machinery, eecrica machinery, ransporaion equipmen, and precision insrumens indusries. 22 We ried he case where he cross erm of he indusry dummy wih profi rae revision is aso added as an expanaory variabe. I was insignifican for a of he revision daes, whie he cross erm of he indusry dummy wih saes growh rae remained significany posiive, irrespecive of he revision dae. 16

20 References [1] Abe, A.B. and O.J. Banchard (1988). Invesmen and Saes: Some Empirica Evidence, in W. A. Barne, E. R. Bernd, and H. Whie (eds.), Dynamic Economeric Modeing, Cambridge Universiy Press, pp [2] Barro,R.J. (1990). The Sock Marke and Invesmen, Review of Financia Sudies 3, pp [3] Banchard, O.J., Changyong, R. and L. Summers (1993). The Sock Marke, Profi, and Invesmen, Quarery Journa of Economics 108, pp [4] Deveopmen Bank of Japan (1999). Survey Repor on Panned Capia Spending for Fisca Years, 1998,1999 and 2000, Research Repor No.2 [5] Deveopmen Bank of Japan (2001). Empirica Reassessmen of Japanese Corporae Invesmen Behavior: Feaures and Changes since he 1980s, Based on Micro-eve Pane Daa, Research Repor No.12 [6] Gaeoi, M. and F. Schianarei (1991). Generaized Q Modes for Invesmen, Review of Economics and Saisics 73, pp [7] Hayashi,F. (1982). Tobin's Margina Q and Average Q: A Neocassica Inerpreaion, Economerica 50, pp [8] Ha, R.E. (1978). Sochasic Impicaions of he Life Cyce-Permanen Income Hypohesis: Theory and Evidence, Journa of Poiica Economy 86, pp [9] Lamon, O.A. (2000). Invesmen Pans and Sock Reurns, Journa of Finance 55, pp

21 [10] Lindenberg, E.B. and S. A. Ross (1981). Tobin s q Raio and Indusria Organizaion, Journa of Business 54, pp [11] Morck,R., Sheifer,A., and R.W.Vishny (1990). The Sock Marke and Invesmen: Is he Marke a Sideshow? Brookings Papers on Economic Aciviy 2, pp [12] Ogawa,K. and S. Kiasaka (1999). Marke Vauaion and he q Theory Invesmen, Japanese Economic Review 50, pp [13] Pakes,A. (1985). On Paens, R&D, and he Sock Marke Rae of Reurn, Journa of Poiica Economy 93, pp [14] Schankerman,M. (2002). Idiosyncraic and Common Shocks o Invesmen Decisions, Economic Journa 112, pp [15] Schianarei, F. and D. Geogousos (1990). Monopoisic Compeiion and he q Theory of Invesmen, European Economic Review 34, pp [16] Tobin,J. (1969)." A Genera Equiibrium Approach o Moneary Theory," Journa of Money, Credi, and Banking 1, pp

22 Figure 1 Process of Invesmen Revision in Period Period Sub-period Firs Firs Second Fina invesmen revision revision revision, pan which is execued k

23 Figure 2 Annua Proecion of Invesmen Growh Rae % 10 0 June Sepember December March June (acua) Source: The Bank of Japan, Shor-erm Economic Survey of Enerprises.

24 Tabe 1 Revision of Proeced Annua Invesmen Growh Rae and Arriving News: Basic Case Expanaory variabes REVPROFIT REVSALE Invesmen Revision June o Sepember Sepember o December December o March *** *** *** * *** (5.92) (3.59) (3.26) (1.80) (3.50) (0.88) *** *** *** *** **** *** (6.73) (3.15) (3.77) (2.59) (5.86) (4.68) Lagged invesmen revision *** *** ** *** *** *** (2.94) (2.65) (2.37) (-11.52) (-12.15) (-12.18) 2 Adused R S.E Noes: The vaues in parenheses are -vaues. Esimaes of consan and indusry dummies are suppressed. ***, **, * significan a 1%, 5%, and 10% eve, respecivey.

25 Tabe 2 Revision of Proeced Annua Invesmen Growh Rae and Arriving News: Exended Case Expanaory Invesmen Revision variabes June o Sepember Sepember o December December o March REVPROFIT *** (3.50) (1.44) (1.09) REVSALE *** *** *** (3.76) (2.80) (4.93) REVPRICE (-1.39) (-0.33) (-1.43) REVAVECOST ** *** (2.15) (0.02) (3.07) REVINT (1.27) (-0.77) (0.84) REVLEND (-0.97) (1.42) (0.42) Lagged ** *** invesmen (2.39) (-12.40) revision 2 Adused R S.E Noes: See he noes in Tabe

26 Tabe 3 Tes Saisics of Maringae Hypohesis Invesmen revision June o Sepember Sepember o December December o March Tes Saisics F(5,217) F(5,288) F(5,288) (0.70) (0.04) (0.25) Noes: Vaues in parenhesis are p-vaues.

27 Tabe 4 Sock Reurn and Arriving News Expanaory variabes REVPROFIT REVSALE Sock Reurn June o Sepember Sepember o December December o March *** *** *** *** (6.87) (5.97) (5.36) (5.05) (1.43) (0.91) *** * (4.47) (-0.14) (1.87) (-0.77) (1.29) (0.68) 2 Adused R S.E Noes: See he noes in Tabe 1.

28 Tabe 5 Sock Reurn and Revision of Proeced Annua Invesmen Growh Rae: Basic Case Expanaory variabes Sock reurn REVSALE Lagged invesmen revision Invesmen Revision June o Sepember Sepember o December December o March OLS IV IV OLS IV IV OLS IV IV *** ** * ** ** * (3.36) (2.21) (1.90) (0.77) (2.22) (1.64) (0.45) (2.09) (1.65) *** *** *** (2.66) (2.88) (3.29) *** *** ** *** *** *** (3.81) (2.81) (2.17) (-10.96) (-6.41) (-7.82) 2 Adused R S.E Noes: See he noes in Tabe 1.

29 Tabe 6 Sock Reurn and Revision of Proeced Annua Invesmen Growh Rae: Exended Case Invesmen Revision Expanaory June o Sepember Sepember o December December o March variabes IV IV IV Sock reurn * (1.90) (1.43) (1.50) REVSALE *** ** *** (3.66) (2.30) (4.64) REVPRICE * (-0.56) (0.22) (-1.76) REVAVECOST *** *** (2.85) (-0.02) (2.96) REVINT (1.32) (0.29) (1.28) REVLEND (0.97) (0.14) (1.02) Lagged ** *** invesmen (2.15) (-9.40) revision S.E Noes: See he noes in Tabe

30 Tabe 7 Revision of Proeced Annua Invesmen Growh Rae and Marke Share Hypohesis Expanaory variabes REVPROFIT REVSALE REVSALE Indusry dummy June o Sepember *** *** (3.22) (3.20) * ** (1.91) (2.46) ** ** (2.21) (2.20) Invesmen Revision Sepember o December (1.49) (1.14) * ** (1.92) (2.05) * * (1.80) (1.87) December o March (0.05) (0.25) *** *** (4.72) (4.96) ** ** (2.07) (2.13) REVPRICE REVAVECOST REVINT REVLEND Lagged invesmen revision (-1.30) ** (2.36) (1.11) (-0.79) (-0.04) (0.11) (-0.72) (1.58) ** ** (2.02) (2.04) (-1.41) *** (3.12) (0.85) (0.41) *** *** (-12.38) (-12.62) 2 R Adused S.E. Noes: See he noes in Tabe