Allocative Efficiency of Capital across Japanese Firms

Using the firm-level information of the Financial Statements of Corporations by Industry compiled annually by the Japanese Ministry of Finance, we gauge the allocative efficiency of capital across non-financial firms from 1983 to 2017. We carefully correct the biases stemming from changes in the sampling methodology over the years. We then estimate dispersion in the return on assets (EBIT/total assets) across firms each year, controlling for differences in growth expectations and risks by regressions. Capital allocation rapidly became inefficient around the time when the economic bubbles burst. The degree of inefficiency seems to have stabilized at a high level afterwards, but recently, it appears to be deteriorating again. Moreover, we find that cash and deposit holdings at the firm level have nothing to do with the deteriorating trend of allocative efficiency of capital. Rather, it is estimated to increase the return.