Investment-Cash Flow Sensitivities Are Not Valid Measures Of Financing Constraints

Work by Kaplan and Zingales provides both theoretical arguments and empirical evidence that investment-cash flow sensitivities are not good indicators of financing constraints. Fazzari, Hubbard, and Petersen {this Journal} criticize those findings. In this note we explain how the Fazzari et al. criticisms are either very supportive of the claims in earlier work by Kaplan and Zingales or incorrect. We conclude with a discussion of unanswered questions. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology