Appended Note 2-2 Excessive Debts and Business Investment

By using listed companies' financial data in Corporate Finance Database of the Japan Economic Research Institute, cross sectional estimates were made on the influence of a rise in debts-to-sales ratio from the first half of the 1980s to the first half of the 1990s on the growth of business investment from the first half of the 1990s to the second half of the 1990s. The estimates covered companies that remained listed from FY 1980 to FY 1999.

(a) Estimate equation

inv=C+*ds+*cfs inv:Growth rate of business investment (the growth of business investment from the average for FY 1990-94 to the average for FY 1995-99)

ds:Fluctuation margin of costs-to-sales ratio (fluctuation margin from the FY 1980-84 average to the FY 1990-94 average of ( (short-term loans+long-term loans+corporate bonds+balance of bills receivable discount)/sales).

cfs:Changes of cash flow (the increase of cash flow (=after-tax profits--directors' bonus--dividends=depreciation expense) from the FY 1990-94 average to the FY 1995-99 average divided by the FY 1990-99 average sales)

(b) Estimate results

On the basis of the estimate results, we calculated FY 1995-99 business investment by all industries, supposing that the costs-to-sales ratio for FY 1990-94 remained at the same level as the average for FY 1980-84. The calculation shows that the deviation from the actual FY 1995-99 business investment was 7.7%.