Investment-cash flow sensitivities, credit rationing and financing constraints

The controversy over whether investment-cash flow sensitivity is a good indicator of financing constraints is still unresolved. We tackle it from several different angles and cross-validate our analysis with both balance sheet and qualitative data on self-declared credit rationing and financing constraints. Our qualitative information shows that (self-declared) credit rationing is (weakly) related to both traditional a priori factors – such as firm size, age and location – and lenders’ rational decisions based on their credit risk models. We use our qualitative information on firms that were denied credit to provide evidence relevant to the investment-cash flow sensitivity debate. Our results show that self-declared credit rationing significantly discriminates between firms that do and do not have such sensitivity, whereas a priori criteria do not. The same result does not apply when we consider the wider group of financially constrained firms (which do not seem to have a higher investment-cash flow sensitivity), which supports the more recent empirical evidence in this direction.