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Investment-Cash Flow Sensitivities or Cash-Cash Flow Sensitivities? An Evaluative Framework for Measures of Financial Constraints

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Author Info

  • Bert D'Espallier
  • Sigrid Vandemaele
  • Ludo Peeters

Abstract

We evaluate two models commonly used for measuring financial constraints in their ability to discriminate between constrained and unconstrained firms. We compute firm-specific estimates for the "cash flow sensitivity of investment" (CFSI), and the "cash flow sensitivity of cash" (CFSC) and provide a framework that summarizes the performance of each model into a single numerical metric. We argue that this 'ex-post' approach provides interesting advantages over the traditional operationalization, in which firms are classified 'ex-ante' on a theoretical basis. Our findings suggest the superiority of the CFSI model over the CFSC model for a sample of manufacturing SMEs in Belgium. Copyright (c) 2008 The Authors Journal compilation (c) 2008 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 35 (2008-09)
Issue (Month): 7-8 ()
Pages: 943-968

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Handle: RePEc:bla:jbfnac:v:35:y:2008-09:i:7-8:p:943-968

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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Cited by:
  1. Filipe Silva & Carlos Carreira, 2012. "Measuring Firms' Financial Constraints: A Rough Guide," Notas Económicas, Faculdade de Economia, Universidade de Coimbra, issue 36, pages 23-46, December.

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