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

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  • Charles J. Hadlock
  • Joshua R. Pierce
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    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. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 23 (2010)
    Issue (Month): 5 ()
    Pages: 1909-1940

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    Handle: RePEc:oup:rfinst:v:23:y:2010:i:5:p:1909-1940

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    Cited by:
    1. Dewaelheyns, Nico & Locorotondo, Rosy & Van Hulle, Cynthia, 2011. "Cash holdings within subsidiaries: impact of group health," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/388047, Katholieke Universiteit Leuven.
    2. Senay Agca & Deniz Igan, 2013. "Fiscal Consolidation and the Cost of Credit: Evidence from Syndicated Loans," IMF Working Papers 13/36, International Monetary Fund.
    3. Li, Dongmei & Zhang, Lu, 2010. "Does q-theory with investment frictions explain anomalies in the cross section of returns?," Journal of Financial Economics, Elsevier, vol. 98(2), pages 297-314, November.
    4. Carlos Carreira & Filipe Silva, 2012. "Where Are the Fragilities? The Relationship Between Firms' Financial Constraints, Size, and Age," GEMF Working Papers 2012-12, GEMF - Faculdade de Economia, Universidade de Coimbra.
    5. Dewaelheyns, Nico & Locorotondo, Rosy & Van Hulle, Cynthia, 2010. "Cash holdings within subsidiaries: impact of group health," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/387990, Katholieke Universiteit Leuven.
    6. Chongyang Chen & Zhonglan Dai & Douglas A. Shackelford & Harold H. Zhang, 2012. "Does Financial Constraint Affect Shareholder Taxes and the Cost of Equity Capital?," Working Papers 1202, Oxford University Centre for Business Taxation.
    7. 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.
    8. Lam, F.Y. Eric C. & Wei, K.C. John, 2011. "Limits-to-arbitrage, investment frictions, and the asset growth anomaly," Journal of Financial Economics, Elsevier, vol. 102(1), pages 127-149, October.
    9. Maksimovic, Vojislav & Phillips, Gordon & Prabhala, N.R., 2011. "Post-merger restructuring and the boundaries of the firm," Journal of Financial Economics, Elsevier, vol. 102(2), pages 317-343.
    10. Chongyang Chen & Zhonglan Dai & Douglas Shackelford & Harold Zhang, 2011. "Does Financial Constraint Affect Shareholder Taxes and the Cost of Equity Capital?," NBER Working Papers 17169, National Bureau of Economic Research, Inc.

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