Do Investment Cash-Flow Sensitivities Provide Useful Measures of Financing Constraints?

QUARTERLY J. OF ECONOMICS, Vol. 112 No. 1, February 1997

Posted: 21 Jul 1997

See all articles by Steven N. Kaplan

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Luigi Zingales

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

Abstract

This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen 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, subperiods, 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: G31, G32

Suggested Citation

Kaplan, Steven Neil and Zingales, Luigi, Do Investment Cash-Flow Sensitivities Provide Useful Measures of Financing Constraints?. QUARTERLY J. OF ECONOMICS, Vol. 112 No. 1, February 1997. Available at SSRN: https://ssrn.com/abstract=8429

Steven Neil Kaplan (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Luigi Zingales

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-3196 (Phone)
773-834-2081 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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