New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index

Hadlock, Charles J.; Pierce, Joshua R.

New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index

Review of Financial Studies, Forthcoming

48 Pages Posted: 8 May 2008 Last revised: 8 Nov 2009

See all articles by Charles J. Hadlock

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce

Date Written: September 14, 2009

Abstract

We collect detailed qualitative information from financial filings to categorize financial constraints for a random sample of firms from 1995 to 2004. Using this categorization, we estimate ordered logit models predicting constraints as a function of different quantitative factors. Our findings cast serious doubt on the validity of the KZ index as a measure of financial constraints, while offering mixed evidence on the validity of other common measures of constraints. We find that firm size and age are particularly useful predictors of financial constraint levels, and we propose a measure of financial constraints that is based solely on these firm characteristics.

Keywords: financial constraints, KZ index, qualitative information, investment

JEL Classification: G31, G32, D92

Suggested Citation: Suggested Citation

Hadlock, Charles J. and Pierce, Joshua R., New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index (September 14, 2009). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1129265