Do Investment-Cashflow Sensitivities Provide Useful Measures of Financing Constraints?

Posted: 25 Jun 1998

See all articles by Steven N. Kaplan

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); University of Chicago - Polsky Center for Entrepreneurship

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: February 1996

Abstract

This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen [1988] as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, sub-periods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more financially constrained. These findings call into question the interpretation of most previous research that uses this methodology.

JEL Classification: D92, E22, G31

Suggested Citation

Kaplan, Steven Neil and Zingales, Luigi, Do Investment-Cashflow Sensitivities Provide Useful Measures of Financing Constraints? (February 1996 ). Available at SSRN: https://ssrn.com/abstract=7444

Steven Neil Kaplan

University of Chicago - Booth School of Business ( email )

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European Corporate Governance Institute (ECGI) ( email )

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University of Chicago - Polsky Center for Entrepreneurship

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Luigi Zingales (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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