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

Authors

  • Bert D'Espallier,

    1. The authors are from the KIZOK Research Institute, Hasselt University. They thank Andrew Stark (editor) and an anonymous referee for useful comments and suggestions. Earlier versions of this paper have been presented at RENT XIX (Naples), the 2006 EFMA Annual Meeting (Madrid) and the 2007 EFA doctoral tutorial (Ljubljana). The authors are thankful for numerous helpful comments during these conferences. They especially acknowledge valuable suggestions from Sean Cleary, Tom Berglund and José Marti Pellon.
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  • Sigrid Vandemaele,

    1. The authors are from the KIZOK Research Institute, Hasselt University. They thank Andrew Stark (editor) and an anonymous referee for useful comments and suggestions. Earlier versions of this paper have been presented at RENT XIX (Naples), the 2006 EFMA Annual Meeting (Madrid) and the 2007 EFA doctoral tutorial (Ljubljana). The authors are thankful for numerous helpful comments during these conferences. They especially acknowledge valuable suggestions from Sean Cleary, Tom Berglund and José Marti Pellon.
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  • Ludo Peeters

    Corresponding author
    1. The authors are from the KIZOK Research Institute, Hasselt University. They thank Andrew Stark (editor) and an anonymous referee for useful comments and suggestions. Earlier versions of this paper have been presented at RENT XIX (Naples), the 2006 EFMA Annual Meeting (Madrid) and the 2007 EFA doctoral tutorial (Ljubljana). The authors are thankful for numerous helpful comments during these conferences. They especially acknowledge valuable suggestions from Sean Cleary, Tom Berglund and José Marti Pellon.
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* Address for Correspondence: Bert D'Espallier, Agoralaan gebouw D, 3590 Diepenbeek, Belgium. e-mail: bert.despallier@uhasselt.be

Abstract

Abstract:  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.

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