Theory and fact of Japanese capital investment: has the Japanese capital investment been made optimally?

The capital investment decision by the company should be made in a way that maximises its stock price. From this point of view, based on Tobin's q theory, we examine the capital investment trends of Japanese companies using panel data after the burst of the bubble economy. The novelty of our paper is that the optimal capital investment is derived from clarifying the adjustment cost of capital investment in the analysis. Based on the derived adjustment costs, we investigate whether the capital investment has been optimal, using a sample of Japanese companies from 1990 to 2014. We find that the Japanese companies have been under investing for most of the period analysed. Our results indicate that the underinvestment by Japanese companies is not because of their strict financial constraints but because their capital investments are determined based on the return on equity (ROE) of the previous year. It should be emphasised that the capital investment decision is not made based on Tobin's q. We conclude that Japanese companies do not make investment decisions from the perspective of maximising shareholder value.