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

:  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...

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Bibliographic Details
Published in:Journal of business finance & accounting 2008-09, Vol.35 (7-8), p.943-968
Main Authors: D'Espallier, Bert, Vandemaele, Sigrid, Peeters, Ludo
Format: Article
Language:English
Subjects:
Accounting
Belgium
Business management
Business studies
Cash flow
Corporate finance
Econometrics
entropy econometrics
Finance
financial constraints
Investment
Manufacturers
slope heterogeneity
Small & medium sized enterprises-SME
Small and medium sized enterprises
small business finance
Studies
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Summary::  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.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.2008.02101.x