Investment-cash flow sensitivities are useful: A comment on Kaplan and Zingales

A recent paper in this Journal by Kaplan and Zingales reexamines a subset o f firms from work of Fazzari, Hubbard, and Petersen and criticizes the usef ulness of investment-cash flow sensitivities for detecting financing constr aints. We show that the Kaplan and Zingales theoretical model fails to capt ure the approach employed in the literature and thus does not provide an ef fective critique. Moreover, we describe why their empirical classification system is flawed in identifying both whether firms are constrained and the relative degree of constraints across firm groups. We conclude that their r esults do not support their conclusions about the usefulness of investment- cash flow sensitivities.