Does Agency Cost Model Explain Business Fluctuations in Japan?: An Empirical Attempt to Estimate Agency Cost by Firm Size

31 Pages Posted: 21 Jul 2003

See all articles by Kazuo Ogawa

Kazuo Ogawa

Osaka University - Institute of Social and Economic Research (ISER)

Hirokuni Uchiyama

Osaka University - Graduate School of Economics

Date Written: April 2003

Abstract

An attempt is made to estimate a state space model of investment and borrowing in a Bayesian framework and extract the unobservable agency cost of Japanese firms by firm size. Our estimates of the agency cost exhibited a declining trend in the late 80s and then switched to an increasing trend in the 90s. We pin down the driving force of agency cost to be the market value of land. Furthermore, we find that investment and borrowing behavior of small firms is very much affected by their agency cost in the late 80s and the 90s. Our evidence demonstrates that imperfection of capital market is notable for small firms in Japan.

Keywords: Agency cost, Investment, Collateral, Land, Borrowing, State space model, Kalman filter, Gibbs sampling

JEL Classification: C51, E22, E44, E51

Suggested Citation

Ogawa, Kazuo and Uchiyama, Hirokuni, Does Agency Cost Model Explain Business Fluctuations in Japan?: An Empirical Attempt to Estimate Agency Cost by Firm Size (April 2003). Available at SSRN: https://ssrn.com/abstract=401321 or http://dx.doi.org/10.2139/ssrn.401321

Kazuo Ogawa (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan
+81 6 6879 8570 (Phone)

Hirokuni Uchiyama

Osaka University - Graduate School of Economics ( email )

1-7 Machikaneyama
Toyonaka, Osaka, 560-0043
Japan