Analyzing Determinants of Corporate Investment Behavior: Progress in Investment Diversification and Roles of Internal Funds

This paper uses panel data from Japanese manufacturing companies to estimate a plant and equipment investment function and a broadly defined investment function and to empirically analyze two hypotheses regarding investment. The first hypothesis is that Japanese companies are too safety-oriented when promoting investment. The second hypothesis is that broadly defined investment, including mergers and acquisitions, research and development investment, and plant and equipment investment are not necessarily as restricted as M&A and R&D investment is increasing, even though with plant and equipment investment being restricted. The empirical analysis has produced three findings. First, the broadly defined investment function’s explanatory power is generally strong, indicating that companies give priority to broadly defined investment in making business decisions. Second, investment behavior at the time of the Lehman Shock differed from that before and after the shock. Third, companies with financial surpluses, as well as those with financial deficits, base investment level decisions on their internal funds levels. Companies with financial deficits, which are relatively proactive towards investment, give priority to internal fund factors as well as real factors in making investment decisions. Given the above, the both hypotheses subjected to this analysis are apparently supported to some extent.