Investment–Cash Flow Sensitivities: Constrained versus Unconstrained Firms



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    • Moyen is from the Leeds School of Business at the University of Colorado. I would like to thank Martin Boileau, Murillo Campello, Gilles Chemla, João Gomes, Rob Heinkel Burton Hollifield, Chris Leach, Jaime Zender, an anonymous referee, and participants at the American Finance Association meetings and at the Western Finance Association meetings for helpful comments.


From the existing literature, it is not clear what effect financing constraints have on the sensitivities of firms' investment to their cash flow. I propose an explanation that reconciles the conflicting empirical evidence. I present two models: the unconstrained model, in which firms can raise external funds, and the constrained model, in which firms cannot do so. Using low dividends to identify financing constraints in my generated panel of data produces results consistent with those of Fazzari, Hubbard, and Petersen; using the constrained model produces results consistent with those of Kaplan and Zingales.