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

  • Kaplan, Steven N
  • Zingales, Luigi

This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Steven Fazari, R. Glenn Hubbard, and Bruce Petersen as having unusually high investment-cash flow sensitivities. The authors find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. They 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. Copyright 1997, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 112 (1997)
Issue (Month): 1 (February)
Pages: 169-215

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Handle: RePEc:tpr:qjecon:v:112:y:1997:i:1:p:169-215
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