Why Is Investment So Weak Despite High Profitability? A panel study of Japanese manufacturing firms

Author Name OGAWA Kazuo (Kansai Gaidai University) / Elmer STERKEN (University of Groningen) / TOKUTSU Ichiro (Kobe University)
Creation Date/NO. February 2019 19-E-009
Research Project Study Group on Corporate Finance and Firm Dynamics
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We examine the investment behavior of Japanese manufacturing firms, using firm-level panel data for the period of 1970 to 2014. We find that the profitability of investment, measured by marginal q, has increased over time, while the investment rate has declined. We shed light on the perceived gap between investment and marginal q by estimating a marginal q-type investment function. We find that the investment sensitivity to profitability has declined steadily, which is partly explained by a decrease in the proportion of growth firms that have strong investment sensitivity to marginal q, and an increase in the proportion of restructuring firms that have weak investment sensitivity to marginal q.