Do large scale investments improve corporate performance?

Author Name TANAKA Kenji  (DEVELOPMENT BANK OF JAPAN Inc.) /MIYAGAWA Tsutomu  (Faculty Fellow, RIETI)
Creation Date/NO. November 2009 09-J-032
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Investment spikes have affected the movement in aggregate investment in Japan. On average, 15% of total listed firms in Japan conducted large-scale investments that created spikes in investment during the past 30 years. From the results in our Probit estimation, we find that large scale investments are induced by not only Tobin's Q and cash flow, but also bandwagon effects. Using our estimation results, we compared the performances of firms that made large-scale investments and firms that did not. We find that the sales figures and number of employees in firms that made large-scale investment are greater than those that did not do so. Moreover, after the collapse of the bubble economy, TFP growth and the rate of return in firms that conducted large-scale investments are higher than those that did not.