New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index

Review of Financial Studies (Impact Factor: 4.75). 04/2010; 23(5):1909-1940. DOI: 10.1093/rfs/hhq009
Source: RePEc


We collect detailed qualitative information from financial filings to categorize financial constraints for a random sample
of firms from 1995 to 2004. Using this categorization, we estimate ordered logit models predicting constraints as a function
of different quantitative factors. Our findings cast serious doubt on the validity of the KZ index as a measure of financial
constraints, while offering mixed evidence on the validity of other common measures of constraints. We find that firm size
and age are particularly useful predictors of financial constraint levels, and we propose a measure of financial constraints
that is based solely on these firm characteristics.

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