DO INVESTMENT-CASH FLOW SENSITIVITIES PROVIDE USEFUL MEASURES OF FINANCING CONSTRAINTS

No. This paper investigates the relationship between financing constra ints and investment-cash flow sensitivities by analyzing the firms ide ntified by Fazzari, Hubbard, and Petersen as having unusually high inv estment-cash flow sensitivities. We find that firms that appear less f inancially constrained exhibit significantly greater sensitivities tha n firms that appear more financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensit ivities cannot be interpreted as evidence that firms are more financia lly constrained. These findings call into question the interpretation of most previous research that uses this methodology.