chapter 3 cost of capital and investment · chapter 3 . cost of capital and investment . masashi...

Chapter 3 Cost of capital and Investment

Masashi Manabe

Satoko Maekawa

1. Introduction

As one of the economic stimulus measures, reduction of corporate tax burden has been

discussed in order to cope with globalization and international severe competition. In such

discussions it should be necessary to make clear the effective level of corporate tax burden and the

effects of reduction of corporate taxation on investment in Japan. In Chapter 1, we estimated and

compared the effective rates of corporate tax in Japan as well as in other major developed countries.

In Chapter 2, we calculated tax-adjusted costs of capital and the contribution of tax factor to cost of

capital. The results of those analyses indicate that it is still possible to lower the corporate tax

burden in Japan and to reduce the costs of capital by such a reduction.

Could the cost of capital really affect the corporate investment? If so, how much could the

reduction of corporate tax raise the investment? In order to answer these questions we analyze the

relationship between the tax-adjusted cost of capital and investment in Japan.

Theoretically Jorgenson (1963) formulated the companies’ investment function with an

intellection of cost of capital, which is one of the indicators made by integrated funding cost,

investment-goods’ prices, rate of depreciation allowance and corporate tax rate. As a matter of

course, the corporate value maximization model derives this connection. Based on the theoretical

development, a Jorgenson-type investment function was often used for estimation in Japan.

Representative studies are Takenaka, Takabayashi, Tsukakoshi, Kuwana and Yoshida (1986) and

Tajika and Yui (1988).1

1 Other studies that analyzed the connection between investment and taxation system are Tajika and Yui (1984, 1985), Honma, Hayashi, Atoda and Hata (1984), Honma, Iwamoto, Asada,

44

As gl

ies about corporate investment have been concentrated on certain financial

aspec

s

s

t.

,

ged in

this tu

as

calcul

ill explain the investment

obalization has been progressing, the factors that should be considered in investment decision

are becoming more diverse than ever before. Global companies certainly have to consider the

political conditions, economic situation and taxation system in a potential investment destination.

Focusing oneself solely on the investment inflow to Japan, traditional factors such as interest rates

for funding, capital goods prices and land prices weigh heavily for the decision-makers.

However, stud

ts. Issues like bad-loan problems have been the main focus and have neglected overall

investment determinants analysis including the taxation system. This is mainly due to Japan’

recent macroeconomic situation. In the period of the economic bubble we saw rising stock price

and land values steeply and after that experienced the substantial decline in them as the bubble burs

A long economic slowdown followed along with policy failure. Corporate investment could have

been influenced in the past two decades by the changing economic climate; economic bubble period

period of fallout from the bursting bubble, deflationary period and minor recovery period.

This paper will examine how the relation between cost of capital and investment chan

rbulent period and will quantitatively measure those changes. Beyond any doubt, corporate

investment is influenced not only by the cost of capital but also other economic variables and

environmental variables. Hence these factors will be considered as well. Moreover, this paper will

investigate the effects of reduction of corporate tax rate on promotion of corporate investment.

In particular, investment functions will be estimated using the cost of capital, which w

ated in the previous chapter. We will be look at three categories of industry that have been

stipulated by the Japan Standardized Industrial Classification Code. The first category is large

groups by industry, which is made up of nine major industries such as agriculture, forestry and

fisheries, mining, manufacturing, etc. The second one is 15 manufacturing industries of medium

groups by industry, which is mainly made up of food and tobacco, textile, chemicals, etc. And the

third category is capital size. Based on the results of investment functions we will estimate how

much investment could be stimulated by reduction of corporate tax rate.

The following is the contexture of this chapter: In Section 2, we w

Sunagawa and Sano (1989), Iwata, Suzuki and Yoshida (1987). In the 1990s, Hayashi and Inoue (1991) conducted the empirical analysis about Q and business growth and Asako, Kuninori, Inoue and Murase (1997) estimated the investment function which includes the land investment. Uemura and Maekawa (2000) is a recent study.

45

functi

. Model and Data

-1 Estimation Model

stment function defined by Jorgenson (1963) can also be derived by a

dynam

＝（，） (1)

here denotes the investment in the period t, denotes the capital stock in the

period

period is used. Hence supposing the

produ

on model and estimation method. In section 3, estimation results will be examined in order of

the three industrial categories. As a policy implication, in section 4, we will derive the impact of a

1% corporation tax rate reduction to investment based on the previous section results. Then we will

conclude by mentioning the remaining future issues.

2

2

Neoclassical-type inve

ic optimized approach that maximizes present discounted value of net cash flow. The

simplest investment function determining the production only by capital and labor is:

tI tI tC 1−tK

W tI

C

1−tK

. t-1 and t denotes the cost of capital in the period t

In actual estimation, data including the so-called bubble

ction function which includes the land as variable, the following estimation model is used:

ttL

tt

t uPCKI

+++=−

γβα1

(2)

here indicates the land price in the period t and indicates the disturbance term in

the t.

ow, let us explain the sign condition. Degradation of the cost of capital stimulates the

capita

W tLP tu

N

l accumulation, then β <0. Regarding the land price, the rise in land prices facilitates the fund

procurement pledging the and and stimulates investment, hence γ>0. During a bubble period, l

46

corporations put up the land as collateral for fund-raising.2

2-2 Data and Estimation Method

We will estimate the investment functions by industry according to the categories set by the

Japan Standardized Industrial Classification Code and we also estimate by capital size. The

estimation period is from 1985 to 2005.

Table3-1 summarizes the data used for each variable in the model. Basically, ‘other tangible

fixed asset’ in "Houjin, Kigyou, Toukei, and Kihou,(“Financial Statement Statistics of

Corporations”)" (Ministry of Finance) is used as capital stock (K) and the amount of the investment

(I) is measured by ordinary formula of capital accumulation. Depending on the industries’ type and

capital scale, investment is not always done every year. Some companies chose large investment

once a several year. As represented by the construction industry, fluctuation of investment for each

industry is considerably large. Hence tertiary moving average derivation is used. Cost of capital

data calculated by the model built in the statutory tax rate in the Chapter 2 is used as cost of capital.

Land price is commercial land price in six major metropolitan areas of “Urban Land Price Index”

(Japan Real Estate Institute).

We estimated equation (2) using Ordinary Least Square (OLS). The data ranges are from the

bubble period in the late 1980s, the depression period after bubble period in the middle of the

1990s, the deflation period over the late 1990s to 2000. Hence dummy coefficients of cost of

capital are included in 1992-97 and after 98 years, because structural change of the relationship

between investment rate and cost of capital might have occurred.

3. Estimation Results

3-1 Results in Large Groups by industry

Table3-2 shows the estimation results of the all industries and the nine individual industries.

None of the coefficient of cost of capital is significantly negative through the whole period. In only

2 Ogawa and Suzuki (2000) estimated the investment function building the land price into the independent variables and derived the significant result.

47

the manufacturing and electricity, gas & water supply industries, adjusted R square are over 0.9.

Then there is a possibility that significant determinants cannot be considered.

On the other hand, coefficient of cost of capital after 1992 is significantly negative in many

industries, including manufacturing, construction, wholesale and retail trade and information &

telecommunications. In particular, by dividing the dummy variables from 1992 to 1997 and after

1998, better results are estimated. Coefficient of cost of capital through the whole period is not

significant hence it can be considered as 0. Therefore, in the case of all industries coefficient of

cost of capital from 1992 to 1997 is -1.58 and that after 1998 is -3.00. In the case of manufacturing,

coefficient of cost of capital until 1997 is -1.15 and that after 1998 is -2.24. Until 1997,

construction is -1.95 and after 1998 is -2.73. Regarding other industries, coefficient of real estate

and information & telecommunications is relatively high; -3.41 and -3.52 each after 1992.

The coefficient is significant for land price in manufacturing, construction, wholesale and

retail trade, and the service activities industries. This would be caused by the abnormal investment

(behavior) pledging of the land in the bubble period when the coefficient of the capital stock is not

significant.

In Table3-2, showing estimation results, some industries’ coefficient of cost of capital

through the whole period is significantly positive against the theory. These are agriculture, forestry,

the fisheries industry and electricity, gas & water supply industry. Also, at no point did mining

show any significance. The relationship between investment and cost of capital might be disturbed

within these four industries due to other factors. For example, electricity, gas & water supply

industry is greatly influenced by the price of oil. The other three industries are labor-intensive

industries and capital scale is fairly small. Hence assumption of corporate value maximization

activity of the theoretical model deriving the investment function cannot be necessarily applied to

these industries and the result was not significant.

3-2 Results in 15 Manufacturing in the Medium Groups by industry

Next, we will present Table3-3 to see the estimation results for the 15 industries in

manufacturing within the medium category. Regrettably, coefficient of cost of capital after 1992 is

significantly negative only in the three industries; general machinery, electrical machinery and

other manufacturing. Coefficient of general machinery after 1992 is -1.21, electrical machines are

48

－1.43 and other manufacturing is -2.39. Those results are consistent with the results of total

manufacturing in Table3-2, which was -1.15 from 1992 to 1997 and -2.24 after 1998.

However, a number of industries’ coefficients are significantly positive even after 1992 and

some industries’ are not significant. Furthermore, nine industries’ coefficients are significantly

positive over whole period. (textiles, pulp, paper and paper products, chemicals, petroleum and

coal products, iron and steel, non-ferrous metals, fabricated metals, transport equipment, precision

instruments) On the other hand, eight industries’ land price variables are significantly positive.

(foods and tobacco, chemicals, petroleum and coal products, ceramic, stone and clay products,

non-ferrous metals, fabricated metals, other manufacturing) Also six industries’ land price variables

are significantly positive and coefficients of cost of capital for all period are significantly positive

as well. These results can be seen as showing how much Japanese manufacturing can be influenced

by a bubble.

More industries in this category did not meet the sign condition compared to the large

category. One of the reasons for these results would be considered that data of Houjin, Kigyou,

Toukei, Kihou “Financial Statement Statistics of Corporation- (Ministry of Finance)” is a sample

survey, hence more impacts for each company are reflected in focusing on the detail. However, we

can hardly avoid the conclusion that only general machinery, electrical machinery and other

manufacturing invested following the corporate value maximization model, which is assumed in

the theory, and other industries’ investment is influenced by the bubble economy and specific

factors of each.

3-3 Results by Capital Size

Finally, we will focus on the estimation results by capital size in Table3-4, which classified

companies into three categories: big, medium and small. Small capital size companies’ (less then

10 million yen) coefficient is not significant in any period. This could because most of the

companies’ capital size is small and they do not go on the market. So, they do not choose to follow

the corporate value maximization model.

In medium capital size companies (more than 10 million yen, but less than 100 million yen),

the coefficient is significant negative through every period. Coefficient of the whole period is -3.61

and that of after 1992 is fairly high: -5.84 (=-3.61-2.23). Coefficient of land price is also

49

significantly positive. It can be considered that medium size companies used land-collateral loans

during the bubble period but also achieved sound management using the cost of capital as an

objective indicator.

On the other hand, big-size companies’ (more than 100 million yen) coefficients of cost of

capital during the whole period and from 1992 to 1997 are not significant either. This could be

down to sloppily management during the bubble period and after the collapse. However, the

coefficient after 1998 is -1.75, which is significant. Big-size companies’ coefficient is smaller than

that of middle- size companies. It could be thought that larger effects of the burst bubble remain in

big-size companies and they are unable to respond in situations to change of the cost of capital.

4. Conclusion

We calculate the impact of a 1% corporation tax rate reduction on investment with the

previous chapter’ results about the relationship between the corporation tax rate and cost of capital.

The independent variable in the equation is investment rate, hence the amount of investment

increase caused the by a 1% corporation tax rate reduction can be derived by multiplying the

variation of cost of capital, in the results of the previous chapter, by the coefficient in the

estimation results from Table3-2 to Table3-4 and then by the amount of the capital stock.

Table3-5 shows the calculation results of the stimulated amount of investment only for the

industries in which coefficients of cost of capital were significant: all industries, five industries

within the large category (manufacturing, construction, wholesale & retail trade, real estate,

information and telecommunications), and big and medium sized companies. By industry, the

largest stimulated amount is within information and telecommunications, which is less than 230

billion yen. The second is less than 170 billion yen for manufacturing. The third is over 100 billion

yen for construction. Stimulated investment amount across all industries can be expected over 780

billion yen.

By capital size, stimulated amount within big-size companies can be estimated at less than

410 billion yen and that of medium-size companies can be expected to be over 580 billion yen. If

anything, a reduction of the corporation tax rate would possibly stimulate the investment of

50

medium-size companies.

This chapter has examined quantitatively the relationship between investment and cost of

capital built in corporation tax. As a result, a negative relationship between cost of capital and

investment was observed. Obviously, using the land price variable also develops aberrant

investment for some industries in the bubble period. Despite a drop in financial revenue for the

government due to a 1% reduction in corporation tax the national economy is greatly boosted by

the inflow of further corporate investment. This investment inflow outstrips any tax loss.

The remaining issue is the fact that estimation results fail to offer strong explanation of the

results. More accurate and robust estimations with additional variables are necessary. Also, some

coefficients of cost of capital in manufacturing are not significant. That might be led by the

small-size industries but cause investigation is required. Trying data collaboration could do this.

This is an issue for the future.

51

Reference

Asako, K. M. Kuninori, Inoue, T. and H. Murase (1997), Setsubi Toushi to Tochi Toushi:

1977-1994, [Investment and Land Investment] in Asako. K and M. Otaki (Ed.) Gendai

Makuro Keizai Dougaku [Modern Macro Economic Dynamics], Tokyo Daigaku Syuppan Kai,

in Japanese.

Hayashi, F and T, Inoue (1991), The Relation Between Firm Growth and Q with Multiple Capital

Goods; Theory and Evidence from Panel Data on Japanese Firms, Econometrica, 59,

pp.731-753.

Honma, M. Y. Iwamoto, Asada, T. K. Sunagawa and H. Sano (1989), Setsubi Toushi no Zissyo

Bunseki, [Empirical Analysis on Investment], Financial Review, 9, pp.56-95, in Japanese.

Honma, M. H. Hayahi, Atoda. N and K. Hata (1984), Setsubi Toushi to Kigyo Zeisei, [Investment

and Corporate Taxation System], Keizai Kikaku Cho Keizai Kenkyu Zyo Kenkyu Series, 41,

in Japanese.

Iwata, K. I. Suzuki and A. Yoshida (1987), Setsubi Toushi no Sihon Kosuto to Zeisei, [Cost of

Capital and Taxation System of Investment], Keizai Bunseki [Economic Analysis] 107,

pp.1-72, in Japanese.

Jorgenson, D.W. (1963), Capital Theory and Investment Behavior, American Economic Review 53,

pp.247-259.

Ogawa, K. and K. Suzuki (2000), Demand for Bank Loans and Investment under Borrowing

Constraints: A Panel Study Japanese Firm Data, Journal of the Japanese and International

Economies 14, 2000, pp.1-21.

Takenaka, H. K. Takabayashi, Tsukakoshi, Y. Y. Kuwana and Y. Yoshida (1986), Shihon Kosuto no

Kokusai Hikaku, [International Comparison of Cost of Capital], Financial Review, first issue,

pp.29-59, in Japanese.

Tajika, E and Y. Yui (1984), Sengo Nihon no Houzin Zeisei to Setsubi Toushi-Houzin Zei Keigen

Ritsu no Gyousyu Betsu Keisoku wo Chuushin to site. [Corporation Taxation System and

Investment in the Post War Era-With a Central Focus on Measuring Method by sector for

Corporation Reduced Tax Rate], Kikan Gendai Keizai, [Modern Economics], 59, pp.29-49, in

Japanese

Tajika, E. and Y. Yui (1985), Sengo Nihon no Houzin Zeisei to Setsubi Toushi, [Corporate Taxation

52

System and Investment in the Post War Era] in Ito, K. A. Kousaka and Tajika, E (Ed.) Keizai

Hatten to Zaisei Kinyu, [Economic Development and Finance], pp.179-224, Institute of

Developing Economics, in Japanese.

Tajika, E. and Y. Yui (1988), Shihon Kosuto to Houzin Zikkou Zeiritsu, [Cost of capital and

Effective Corporation Tax Rate], Keizai Kenkyu,[Economic Research], 39.2, pp.118-128,

Hitotsubashi University, in Japanese.

Uemura, T. and S. Maekawa (2000), Sangyo Betsu no Toushi Koudou to Houjin Shotokuzei-Kigyo

Zaimu Data wo Riyou sita Tax-Adjusted Q ni yoru Zissyou Bunseki, [Investment and

Corporate Income Tax by industry- Empirical Analysis of Tax-Adjusted Q with Corporate

Financial Data], Nihon Keizai Kenkyu, [Japanese Economic Research], pp.45-70, Japan

Center for Economic Research, in Japanese.

53

Table3-1 Data Used for Estimation of Investment Function

Statistics・Calculation Methods

K Capital Stock

"Other Tangible Fixed Assets" in Financial StatementsStatistics of Corporations by Industry, Quarterly , Ministry ofFinance

P L Land Price ””Urban Land Price Index , Japan Real Estate Institute

C Cost of Capital C estimated in Chapter2

π Capital Goods Inflation Rates π estimated in Chapter2

I Investment I(t)=K(t)-{1+π(t)}K(t-1)

Variable

54

Table3-2 The Estimation Results of Investment Function : All Industry and the Major Groups by industry

Industy Dependent variable Test statistic

All industies constantCost ofcapital

Cost ofcapital

Cost ofcapital Land price adjR

2ＤＷ

（investment rate） all period 1992～1997 1998～2005

coefficients 0.083 -0.018 -1.577 -2.988 0.006 0.635 2.595

ｔ-Value 1.567 -0.025 -1.831 -2.512 0.697ｐ-Value 0.137 0.980 0.086 0.023 0.496

Agriculture,forestry & fishing constant

Cost ofcapital

Cost ofcapital adjR

2ＤＷ

（moving average） all period 1992～2004

coefficients -0.002 0.905 -1.366 0.378 1.916

ｔ-Value -0.104 2.300 -1.647ｐ-Value 0.919 0.034 0.118

Mining constantCost ofcapital

Cost ofcapital adjR2 ＤＷ


coefficients -0.036 0.863 -0.447 0.293 1.759

ｔ-Value -0.668 1.149 -0.200ｐ-Value 0.513 0.266 0.844

Manufacturing constantCost ofcapital

Cost ofcapital

Cost ofcapital Land price adjR2 ＤＷ

（investment rate） all period 1992～1997 1998～2005

coefficients 0.056 -0.262 -1.148 -2.240 0.014 0.901 2.202

ｔ-Value 2.660 -0.875 -4.683 -5.281 3.464ｐ-Value 0.017 0.395 0.000 0.000 0.003

Construction constantCost ofcapital

Cost ofcapital


（moving average） all period 1992～1997 1998～2004

coefficients 0.073 -1.077 -1.945 -2.729 0.025 0.786 2.163

ｔ-Value 1.201 -1.445 -2.071 -2.460 3.212ｐ-Value 0.249 0.169 0.056 0.027 0.006

Electricity, gas &water supply constant

Cost ofcapital



coefficients -0.030 1.028 0.740 0.914 0.912

ｔ-Value -3.619 14.165 3.310ｐ-Value 0.002 0.000 0.004

Wholesale & retailtrade constant

Cost ofcapital


2ＤＷ


coefficients 0.059 -0.571 -1.698 0.013 0.775 2.160

ｔ-Value 1.662 -0.911 -2.899 2.422ｐ-Value 0.116 0.376 0.011 0.028

Real estate constantCost ofcapital



coefficients 0.160 -1.067 -3.407 0.433 1.376

ｔ-Value 2.567 -0.958 -3.366ｐ-Value 0.020 0.351 0.004

Information &telecommunications constant

Cost ofcapital



coefficients 0.120 0.335 -3.523 0.584 0.746

ｔ-Value 1.934 0.359 -3.008ｐ-Value 0.070 0.724 0.008

Service activities constantCost ofcapital



coefficients 0.042 -0.019 -1.694 0.021 0.752 1.699

ｔ-Value 0.724 -0.027 -1.642 2.787ｐ-Value 0.479 0.979 0.120 0.013

55

Table3-3 The Estimation Results of Investment Function: 15 Manufacturing in the Medium Groups

by Industry: No1


Food and tobacco constantCost ofcapital


2ＤＷ

（moving average) all period 1992～2004coefficients 0.013 0.431 -1.220 0.013 0.756 1.611

ｔ-Value 0.332 0.886 -1.581 2.326ｐ-Value 0.744 0.389 0.134 0.034

Textile constantCost ofcapital

Cost ofcapital adjR

2 ＤＷ（moving average） all period 1992～2004

coefficients -0.124 2.835 -0.654 0.640 2.247ｔ-Value -2.665 4.209 -0.927ｐ-Value 0.016 0.001 0.367

Pulp, paper and paperproducts constant

Cost ofcapital

Cost ofcapital adjR

2ＤＷ

（moving average） all period 1992～2004coefficients -0.050 1.626 -0.445 0.750 2.276

ｔ-Value -2.049 5.592 -1.259ｐ-Value 0.056 0.000 0.225

Chemicals constantCost ofcapital


2ＤＷ

（moving average） all period 1992～2004coefficients -0.045 0.951 -0.299 0.012 0.838 1.215

ｔ-Value -3.433 3.621 -1.139 2.270ｐ-Value 0.003 0.002 0.272 0.037

Petroleum and coalproducts constant

Cost ofcapital


2ＤＷ

（moving average） all period 1992～2004coefficients -0.085 0.431 0.534 0.038 0.884 0.615

ｔ-Value -4.310 2.761 2.507 3.659ｐ-Value 0.001 0.014 0.023 0.002

Ceramic, stone andclay products constant

Cost ofcapital


2 ＤＷ（moving average） all period 1992～2004

coefficients -0.022 0.479 -0.949 0.015 0.669 2.821ｔ-Value -0.468 0.635 -0.938 2.189ｐ-Value 0.646 0.534 0.362 0.044

Iron and steel constantCost ofcapital


2ＤＷ


ｔ-Value -9.356 2.251 4.646 4.878ｐ-Value 0.000 0.039 0.000 0.000

Non-ferrous metals constantCost ofcapital


2ＤＷ


ｔ-Value -8.433 3.306 5.089 7.577ｐ-Value 0.000 0.005 0.000 0.000

56

Table3-3 The Estimation Results of Investment Function: 15 Manufacturing in the

Medium Groups by Industry: No2


Fabricated metals constantCost ofcapital


2ＤＷ

（moving average) all period 1992～2004coefficients -0.073 1.464 0.037 0.015 0.707 1.961

ｔ-Value -2.870 2.256 0.074 2.099ｐ-Value 0.011 0.038 0.942 0.052

General machinery constantCost ofcapital

Cost ofcapital adjR

2ＤＷ

（moving average） all period 1992～2004coefficients 0.011 1.036 -1.211 0.684 1.695

ｔ-Value 0.210 1.458 -1.836ｐ-Value 0.836 0.163 0.084

Electrical machinery constantCost ofcapital

Cost ofcapital adjR

2ＤＷ


ｔ-Value 2.479 1.332 -6.242ｐ-Value 0.024 0.201 0.000

Transport equipment constantCost ofcapital

Cost ofcapital adjR

2ＤＷ


ｔ-Value -3.026 5.915 -0.319ｐ-Value 0.008 0.000 0.754

Precision instruments constantCost ofcapital


2ＤＷ

（moving average） all period 1992～2004coefficients -0.061 3.289 -0.464 -0.029 0.463 2.754

ｔ-Value -1.094 3.024 -0.895 -3.014ｐ-Value 0.290 0.008 0.384 0.008

Newspaper publishingand publishing constant

Cost ofcapital

Cost ofcapital adjR

2ＤＷ


ｔ-Value 0.094 0.727 -0.939ｐ-Value 0.927 0.477 0.361

Other manufacturing constantCost ofcapital


2ＤＷ

（moving average） all period 1992～2004coefficients 0.085 -0.422 -2.393 0.010 0.761 1.568

ｔ-Value 2.155 -0.634 -3.584 1.917ｐ-Value 0.047 0.535 0.003 0.073

57

Table3-4 The Estimation Results of Investment Function : by Asset Size Size of Total Assets Dependent variable Test statistic

Big business constantCost ofcapital

Cost ofcapital

Cost ofcapital adjR

2ＤＷ

（investment rate） all period 1992～1997 1998～2005coefficients 0.074 0.344 -1.134 -1.747 0.578 1.820

ｔ-Value 0.722 0.251 -1.212 -1.871ｐ-Value 0.480 0.805 0.242 0.079

Middle-scale business constantCost ofcapital


2ＤＷ

（moving average） all period 1992～2004coefficients 0.223 -3.612 -2.227 0.021 0.841 1.522

ｔ-Value 5.872 -5.762 -4.570 4.001ｐ-Value 0.000 0.000 0.000 0.001

Small business constantCost ofcapital

Cost ofcapital adjR

2ＤＷ


ｔ-Value -0.495 1.049 -0.802ｐ-Value 0.627 0.309 0.434

Table3-5 The Effects of a 1% Corporation Tax Rate Reduction on Investment

Amount changefor cost ofcapital

Coefficientsof investment

functionStock ofcapital

Amount ofstimulatedinvestment

(A) (B) (C) (A)×(B)×(C)unit - - million yen million yen

industyAll industies -0.0009 -2.988 284415788 783193Agriculture,forestry & fishing - - - -Mining - - - -Manufacturing -0.0011 -2.240 70070890 167823Construction -0.0011 -2.729 9076942 27996Electricity, gas &water supply - - - -Wholesale & retailtrade -0.0010 -1.698 29708096 52552Real estate -0.0009 -3.407 35053371 111696Information andtelecommunications -0.0015 -3.523 43650873 226475Service activities - - - -Size of Total AssetsBig business -0.0013 -1.747 173248665 407266Middle-size business -0.0011 -5.839 87814481 581803Small business - - - -

58

Figure A3-1 Cost of Capital (C) and investment rate (I/K) in All industries

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-2 Cost of Capital (C) and investment rate (I/K) in Agriculture, Forestry &

Fishing

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.31985

Y:I/K

X:C

59

Figure A3-3 Cost of Capital (C) and investment rate (I/K) in Mining

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-4 Cost of Capital (C) and investment rate (I/K) in Manufacturing

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

60

Figure A3-5 Cost of Capital (C) and investment rate (I/K) in Construction

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-6 Cost of Capital (C) and investment rate (I/K) in Electricity, Gas & Water

supply

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

61

Figure A3-7 Cost of Capital (C) and investment rate (I/K) in Wholesale & Retail trade

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-8 Cost of Capital (C) and investment rate (I/K) in Real estate

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.31985

Y:I/K

X:C

62

Figure A3-9 Cost of Capital (C) and investment rate (I/K) in Information &

Telecommunication

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985Y:I/K

X:C

Figure A3-10 Cost of Capital (C) and investment rate (I/K) in Service activities

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

63

Figure A3-11 Cost of Capital (C) and investment rate (I/K) in Food & Tobacco

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-12 Cost of Capital (C) and investment rate (I/K) in Textile

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.31985

Y:I/K

X:C

64

Figure A3-13 Cost of Capital (C) and investment rate (I/K) in Pulp, Paper & Paper

products

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-14 Cost of Capital (C) and investment rate (I/K) in Chemicals

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

65

Figure A3-15 Cost of Capital (C) and investment rate (I/K) in Petroleum & Coal products

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-16 Cost of Capital (C) and investment rate (I/K) in Ceramic, Stone & Clay

products

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

66

Figure A3-17 Cost of Capital (C) and investment rate (I/K) in Iron & Steal

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-18 Cost of Capital (C) and investment rate (I/K) in Non-ferrous metals

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

67

Figure A3-19 Cost of Capital (C) and investment rate (I/K) in Fabricated metals

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-20 Cost of Capital (C) and investment rate (I/K) in General machinery

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

68

Figure A3-21 Cost of Capital (C) and investment rate (I/K) in Electrical machinery

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-22 Cost of Capital (C) and investment rate (I/K) in Transport equipment

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

69

Figure A3-23 Cost of Capital (C) and investment rate (I/K) in Precision instruments

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-24 Cost of Capital (C) and investment rate (I/K) in Newspaper publishing &

Publishing

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

70

Figure A3-25 Cost of Capital (C) and investment rate (I/K) in Other Manufacturing

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-26 Cost of Capital (C) and investment rate (I/K) in Big business

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

71

Figure A3-27 Cost of Capital (C) and investment rate (I/K) in Middle-scale business

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

Figure A3-28 Cost of Capital (C) and investment rate (I/K) in Small business

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3

1985

Y:I/K

X:C

72

chapter 3 cost of capital and investment · chapter 3 . cost of capital and investment . masashi...

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