Conditional investment-cash flow sensitivities and financing constraints

Kaplan and Zingales (QJE, 1997) study the unconditional sensitivity of investment to cash ow in a static demand for capital framework. We study the sensitivity of investment to cash ow conditional on measures of q in an adjustment costs framework, which is more closely related to the empirical literature on investment and \u85nancing constraints. We present a benchmark model in which this conditional investment-cash ow sensitivity increases monotonically with the cost premium for external \u85nance, for \u85rms in a nancially constrained regime. Using simulated data, we show that this pattern is found in the standard linear speci\u85cation that relates investment rates to measures of both cash ow and average q