Asset Prices and Capital Investment – A Panel Stochastic Frontier Approach∗

We investigates the quantitative significance of firms ’ collateral value on external financing for corporate investments using Taiwan’s firm-level data. Taiwan’s real estate price exhibited a full cycle in 1995-2008, with the price declining steadily in 1995-2002 and rising sharply in 2003-2008. The cyclicality of asset prices may imply procyclical bank lending and thus the business investment, which is likely to amplify the aggregate fluctuation. We employ a panel stochastic frontier approach to test whether the cyclicality of asset prices affects the financing constraints on in-vestment through the collateral channel. The estimation results lend strong support to the hypothesis that the collateral channel plays a significant role in generating the procyclicality of bank lending for investment