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Investment-Cash Flow Sensitivities Are not Valid Measures of Financing Constraints (2000)
| Venue: | Quarterly Journal of Economics |
| Citations: | 214 - 0 self |
BibTeX
@ARTICLE{Kaplan00investment-cashflow,
author = {Steven N. Kaplan and Luigi Zingales},
title = {Investment-Cash Flow Sensitivities Are not Valid Measures of Financing Constraints},
journal = {Quarterly Journal of Economics},
year = {2000}
}
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Abstract
Work by Kaplan and Zingales provides both theoretical arguments and empirical evidence that investment-cash �ow sensitivities are not good indicators of �nancing constraints. Fazzari, Hubbard, and Petersen {this Journal} criticize those �ndings. In this note we explain how the Fazzari et al. criticisms are either very supportive of the claims in earlier work by Kaplan and Zingales or incorrect. We conclude with a discussion of unanswered questions. Fazzari, Hubbard, and Petersen {1988} (hereinafter, FHP {1988}) introduce a methodology to identify the presence of �nancing constraints based on the differential sensitivity of corporate investment to cash �ow. Kaplan and Zingales {1997} (hereinafter, KZ) provide both theoretical arguments and empirical evidence that this differential sensitivity is not a valid measure of �nancing constraints. Fazzari, Hubbard, and Petersen {2000} (hereinafter, FHP {2000}) criticize those �ndings. In this note we explain that the main arguments in FHP {2000} are, in fact, quite supportive of KZ’s main conclusion, while the speci�c criticisms in FHP {2000} are unjusti�ed. I. POINTS OF AGREEMENT FHP {2000} admit that �nancially distressed �rms are likely to have lower investment-cash �ow sensitivities than less �nancially constrained �rms. This is exactly the point that the KZ model makes: investment-cash �ow sensitivities are not necessarily monotonic in the degree of �nancing constraints. The only disagreement FHP {2000} have with KZ is how pervasive the nonmonotonicity result is. But this is ultimately an empirical question. FHP {2000} also recognize that the literature on investmentcash �ow sensitivities has not been based on a solid theoretical foundation. As KZ point out, the practice of (1) splitting the sample according to a measure of �nancing constraints and then
Keyphrases
valid measure investment-cash ow sensitivity financing constraint investment-cash flow sensitivity differential sensitivity theoretical argument empirical evidence solid theoretical foundation unanswered question unjusti ed kz model investmentcash ow sensitivity nonmonotonicity result good indicator empirical question kz point cash ow disagreement fhp agreement fhp corporate investment kz main conclusion speci criticism main argument
