Financing Constraints and Corporate Investment: Response to Kaplan and Zingales

Steven M. Fazzari, R. Glenn Hubbard, Bruce C. Petersen

NBER Working Paper No. 5462 (Also Reprint No. r2274)
Issued in January 1996
NBER Program(s):   CF

Kaplan and Zingales (1995, hereafter KZ) criticize Fazzari, Hubbard and Petersen (1988, hereafter FHP) and much ensuing research that uses cross-sectional differences in firm behavior to test for financing constraints on investment. This reply identifies flaws in the KZ analysis. The questions KZ raise have been considered extensively and rigorously in the literature (most of which is not addressed in KZ), with results broadly similar to those of FHP. We also challenge both of KZ's main results. First, their finding that most of the FHP firms are not financially constrained relies on an inappropriate operational definition of what it means to be constrained. Their definition ignores the incentives for firms that operate in imperfect capital markets to accumulate stocks of cash or maintain unused debt capacity to offset partially shocks to the flow of internal finance. Second, the KZ regression results (lower sensitivity of investment to cash flow for firms classified as constrained than for those classified as unconstrained) are uninformative. Their classification approach relies on possibly self- serving managerial statements that may present a distorted picture of firm's availability of finance. It also employs misleading criteria to make unrealistically fine distinctions in the degree of financing constraints, and emphasizes financial distress rather than financing constraints. Finally, econometric problems affect the interpretation of the KZ regressions. We conclude that the KZ findings do not contradict the interpretation of the empirical results in FHP and subsequent research.

download in pdf format
   (640 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5462


  • Quarterly Journal of Economics, vol 115, no. 2, (May 2000), pp. 695-705.
  • Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen & Alan S. Blinder & James M. Poterba, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, vol 1988(1).

Users who downloaded this paper also downloaded* these:
Kaplan and Zingales w5267 Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?
Almeida and Campello w12087 Financial Constraints, Asset Tangibility, and Corporate Investment
Fazzari, Hubbard, and Petersen w2387 Financing Constraints and Corporate Investment
Hubbard w5996 Capital-Market Imperfections and Investment
Kaplan and Zingales w7659 Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us