investment cash flow sensitivity and financial constraint a cluster analysis approach this article sheds light on the mixed empirical evidence concerning financial constraint and investment sensitivity to cash flow the literature suggests that measuring financial constraint is far from straightforward and we therefore propose a cluster analysis procedure to identify unambiguous groups of constrained firms we found the investment results to be highly sensitive to cash flow for financial constraint firms moreover in line with previous research our results showed that the traditional criteria used to identify financially constrained firms led to ambiguous interpretations overall our results propose that the cluster analysis can be used to encompass the various single criterion approaches thereby providing a finer measurement of the financial constraint construct and deeper insight into the relationship between investment sensitivity to cash flow and financial constraint

attitudes toward risk and the risk return paradox prospect theory explanations this study attempted to explain bowman s risk return paradox in terms of recent research in behavioral decision theory and prospect theory the research emphasized the role of reference or target

business groups and internal capital markets the recovery of the mexican economy in the aftermath of the 1995 crisis in the second half of the nineties the mexican economy experienced a severe financial crisis however as the initial panic subsided mexico started to show promising signals of macroeconomic recovery not only did the economy rebound within a year but also grew steadily afterward averaging an annual rate slightly above 5 during 1996 2000 in this article it is suggested that the business group structure helped in the recovery of the economy the collapse of the banking system and the interruption of financing flows through the domestic financial markets was overcome by a change in the firms capital structure firms when possible started to depend more on trade credit and the internal capital market of business groups created a financial cushion that kept the economy working in order to offer a rationale for the mexican experience a theoretical model is presented where it is shown that moral hazard problems are reduced within a business group as long as affiliated firms in the nontradable sector surrender control rights during periods of crisis copyright 2007 oxford university press

financial factors and investment in belgium france germany and the united kingdom a comparison using company panel data we construct company panel data sets for manufacturing firms in belgium france germany and the united kingdom covering the period 1978 1989 these data sets are used to estimate empirical investment equations and to investigate the role played by financial factors in each country a robust finding is that cash flow and profits terms appear to be both statistically and quantitatively more significant in the united kingdom than in the three continental european countries this is consistent with the suggestion that financial constraints on investment may be relatively severe in the more market oriented u k financial system

the wage effects of high performance work organization in manufacturing an unresolved question about now widespread innovative work systems such as teams and quality programs is whether they influence wage determination this study examines that possible association in manufacturing the author uses data from the 1997 national establishment survey that allow examination of how new work systems affected not only employees who were directly involved in them but other workers as well the key finding is that for core blue collar manufacturing employees higher wages were associated with high performance work organization hpwo systems while higher skill levels and computer based technologies were associated with higher wages the key mechanism appears to have been productivity gains independent of skill and technology that were shared via various across the board wage payment systems hpwo systems appear to have increased managers wages as well although through different channels the author finds no evidence that hpwo related wage gains led to greater wage inequality amon

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

financial development and financing constraints international evidence from the structural investment model this article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment the financing constraints are inferred from the investment euler equation by assuming that the firm s stochastic discount factor is a function of the firm s financial position specifically the stock of liquid assets the magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development the size effect business cycles and legal environment effects are also considered copyright 2003 oxford university press

agency relationships in family firms theory and evidence does owner management necessarily eliminate the agency costs of ownership drawing on agency literature and on the economic theory of the household we argue that private ownership and owner management expose privately held owner managed firms to agency threats ignored by jensen s and meckling s 1976 agency model private ownership and owner management not only reduce the effectiveness of external control mechanisms they also expose firms to a self control problem created by incentives that cause owners to take actions which harm themselves as well as those around them jensen 1994 p 43 thus shareholders have incentive to invest resources in curbing both managerialand owner opportunism we extend this thesis to the domain of the family firm after developing hypotheses which describe how family dynamics and specifically altruism exacerbate agency problems experienced by these privately held owner managed firms we use data obtained from a large scale survey of family businesses to field test our hypotheses and find evidence which suggests support for our proposed theory finally we discuss the implications of our theory for research on family and other types of privately held owner managed firms

variations in r d investments of family and nonfamily firms behavioral agency and myopic loss aversion perspectives the behavioral agency model suggests that to preserve socioemotional wealth loss averse family firms usually invest less in r d than nonfamily firms however behavioral agency model predictions a

cooperation productivity and profit sharing firm specific assets generate an ex post bargaining problem over surplus division and rational workers may collude to obtain a surplus share in nonpecuniary form through restriction of effort conversely profit sharing should motivate cooperation to increase productivity when work organization facilitates interaction and horizontal monitoring since productive effort yields positive externalities to workers under contractual surplus sharing in simultaneous tobit estimates we find a strong influence of profit sharing on factor productivity in a sample of medium sized metalworking capitalist firms in west germany proxies for human capital and organizational factors were included

the fit between ceo compensation design and firm risk we examined the effects of unsystematic and systematic firm risk on ceo compensation risk bearing and total pay both the proportion of variable pay in ceo pay packages and their magnitude are curvilinearly related to unsystematic firm risk that is they are highest under conditions of moderate firm specific risk our results are consistent with agency theory predictions that both performance contingent pay and the greater earnings potential associated with that form of pay are highest when an agent has greater control over performance outcomes

barone s 1908 representation of an economy s trade equilibrium and the gains from trade john chipman s 1965 survey of the theory of international trade implied that enrico barone arrived in 1920 23 at an analytical representation of an economy s trading equilibrium in fact the latter appeared in a long footnote here translated found in the original 1908 edition of barone s principi di economia politica the three diagrams accompanying it completely represent an economy s equilibrium in autarky and in trade and its gains from trade thus barone can claim precedence by over twenty years over haberler lerner leontief and viner as the originator of the neoclassical model of an open trading economy and its diagrammatic representation

competition and cooperation in corporate governance the effects of labor institutions on blockholder effectiveness in 23 european countries we provide an analysis of the costs and benefits of blockholding in europe where it is a dominant but certainly not universal corporate governance strategy for shareholders of publicly listed firms we find that the effectiveness of blockholding is conditioned by the specific labor institutions that distinguish european countries from the rest of the world and that these institutional effects involve both competition and cooperation between blockholders and collective labor interests we also find that relational blockholders are better able to cope with or benefit from these institutional effects than arm s length blockholders empirically we use advanced meta analytic methods on a total sample of 748 569 firm year observations derived from 162 studies covering 23 european countries

corporate investment with financial constraints sensitivity of investment to funds from voluntary asset sales we examine the importance of financial constraints for firm investment by looking at the relationship between investment expenditures and proceeds from voluntary asset sales asset sales provide a cleaner indicator of liquidity than cash flows since it appears not to be positively correlated with investment opportunities the cross sectional differences in firm investment are examined using an endogenous switching regression model with unknown sample separation we find that cash obtained from asset sales is a significant determinant of corporate investment and that the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be financially constrained

labor market mobility and cash compensation the moderating effects of race and gender building upon the gender based study conducted by brett and stroh 1997 we examined the moderating effects of gender and race on the relationship between changing employers and compensation attai

when competitive advantage doesn t lead to performance the resource based view and stakeholder bargaining power what if rent from a competitive advantage is appropriated so it cannot be observed in performance measures the resourcebased view was not formulated to examine who will get the rent yet this essay argues that the factors leading to a resource based advantage also predict who will appropriate rent knowledge based assets are promising because firm specificity social complexity and causal ambiguity make them hard to imit ate however the roles of internal stakeholders may grant them a great deal of bargaining power especially relative to investors this essay integrates the resource based view with the bargaining power literature by defining the firm as a nexus of contracts this new lens can help to explain when rent will be generated and simultaneously who will appropriate it in doing so it provides a more robust theory of firm performance than the resource based view alone it is also suggested that this lens might be useful for examining other theories of firm performance

global capital flows and financing constraints firms often cite financing constraints as one of their primary obstacles to investment global capital flows by bringing in scarce capital may ease the financing constraints of host country firms but if incoming foreign investors borrow heavily from domestic banks foreign direct investment may exacerbate financing constraints by crowding host country firms out of domestic capital markets combining a unique cross country firm level panel with time series data on restrictions on international transactions and capital flows harrison love and mcmillan find that different measures of global flows are associated with a reduction in firm level financing constraints first the authors show that one type of capital inflow foreign direct investment is associated with a reduction in financing constraints second they test whether restrictions on international transactions affects the financing constraints of firms the results suggest that only one type of restriction those on capital account transactions negatively affects firms financing constraints the authors also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of foreign direct investment this implies that foreign direct investment eases financing constraints for non multinational firms finally the authors show that 1 foreign direct investment only eases financing constraints in the non g7 countries and 2 other kinds of flows such as portfolio investment have no impact on financing constraints

doing more with less innovation input and output in family firms family firms are often portrayed as an important yet conservative form of organization that is reluctant to invest in innovation however simultaneously evidence has shown that family firms are flourishing and in fact constitute many of the world s most innovative firms our study contributes to disentangling this puzzling effect we argue that family firms owing to the family s high level of control over the firm wealth concentration and importance of nonfinancial goals invest less in innovation but have an increased conversion rate of innovation input into output and ultimately a higher innovation output than nonfamily firms empirical evidence from a meta analysis based on 108 primary studies from 42 countries supports our hypotheses we further argue and empirically show that the observed effects are even stronger when the ceo of the family firm is a later generation family member however when the ceo of the family firm is the firm s founder innovation input is higher and contrary to our initial expectations innovation output is lower than that in other firms we further show that the family firm innovation input output relationships depend on country level factors namely the level of minority shareholder protection and the education level of the workforce in the country

intertemporal variation in financial constraints on investment this article is concerned with understanding how financial constraints on investment vary over the business cycle and whether these constraints are related to macroeconomic policies these issues are investigated within the framework of a time varying parameter model using u s company panel data from 1971 to 1993 a preliminary investigation of parameter stability in investment equations using cross sectional estimation techniques indicates a pattern of parameter variation that conforms to the one captured by the return to normality model the return to normality model is estimated using a bayesian approach the estimation results provide evidence that support the predictions of the models of asymmetric information in capital markets

firm size and job quality a survey of the evidence from germany small firms provide and create a large proportion of jobs in germany are these jobs worse than jobs in larger firms the mosaic picture that emerges from a review of several recent empirical studies using german individual or firm level micro data shows that all in all wages are lower non wage incomes fringes are lower job security is lower work organisation is less rigid institutionalized possibilities for workers participation in decision making are weaker and opportunities for skill enhancement are worse in small firms compared to large firms the weight of evidence therefore indicates that on average small firms offer worse jobs than large firms it is argued that there is no need for policy measures targeted to improve job quality in small firms because higher incomes in large firms can in part be seen as compensating differentials for more rigid work organisation and can follow from wage policies to reduce shirking and turnover that is more costly in large than in small firms furthermore a lower level of remuneration less protection against dismissals a lower level of workers participation and less opportunities for further training all contribute to lower costs in small firms that might be needed to compensate for size related cost disadvantages compared to large firms economic policy should concentrate on keeping barriers to entrepreneurs entry to markets low to foster new firm formation and creative destruction

how would david ricardo have taught the principle of comparative advantage author affiliation andrea maneschi vanderbilt university department of economics nashville tn 37235 usa andrea maneschi vanderbilt edu acknowledgment the present version of this paper has benefitted from the perceptive comments of two anonymous referees for comments and advice on previous versions i am grateful to eric bond mario crucini daniel diatkine roger sandilands bertram schefold and philippe steiner 1 introductionassume that david ricardo s life had extended beyond the age of 51 that he became a professor of political economy in his later years and was invited to lecture on comparative advantage 1 against all odds he displays a remarkable intuition of future developments in economic theory and is able to use the standard tools and graphical techniques found in present day economics textbooks in his lecture ricardo recalls the numerical example contained in his principles of political economy and taxation ricardo 1951b chapter 7 where cloth and wine are traded between england and portugal he reminds his audience that england s exports of cloth embody the labor of 100 men whereas 120 men would be needed to produce its wine imports the corresponding numbers for portugal are 80 for wine exports and 90 for cloth imports england s comparative advantage in cloth is explicitly implied by the numbers 100 and 120 pertaining to its two traded commodities even before ricardo mentions the corresponding numbers for portugal because the amounts of portuguese labor associated with the quantities of wine and cloth actually traded are lower than those of english labor portugal has an absolute advantage in producing both commodities however the fact that 80 120 2this paper aims to present ricardo s illustration of the gains from trade in both algebraic and graphical form using first a linear then a nonlinear model of production section 2 shows how ricardo makes a gradual transition to a complete trade model by quantifying the gains from trade as the amount of labor saved by trade in the case where the two countries transformation curves happen to be linear in section 3 he generalizes his illustration of the gains from trade by using a concave transformation curve in section 4 ricardo proves that the liberalization of trade in wheat raises england s profit rate and reduces rental income and shows these results diagrammatically this effect on profits neglected by contemporary trade textbooks is the second main source of gains from trade section 5 concludes that the resulting representation of the gains from trade does greater justice to ricardo s original trade model than that found in most textbooks 2 the linear ricardian modelafter his painstaking elaboration of diminishing returns to labor leading to the theory of rent in chapter 2 of his principles ricardo would have had little reason to argue that an economy s production possibility frontier is a straight line choosing instead a production structure marked by diminishing returns to labor in agriculture that lead to a concave transformation curve however in this lecture he decides for pedagogical reasons to make a gradual transition to the latter by starting as a temporary working hypothesis with the linear ricardian production model familiar to students of present day textbooks consider the production possibility line be in the left hand quadrant of figure 1 where the horizontal axis measures the quantity of cloth to the left of the origin o and the vertical axis that of wine in the right hand quadrant the horizontal axis measures the workforce in the wine sector lw given a constant labor coefficient in wine production the linear production function oq shows wine output as a function of lw

are family firms good employers family firms employ about 60 percent of the global workforce while it is widely assumed that they are good employers data about their conduct is mixed in this study we extend stewardship and agency theories to test competing propositions about the impact of family on employment practices using data from 14 961 private belgian firms over a 19 year period higher investments lower dividend payout and higher risk tolerance indicate that family firms are better financial stewards of their companies than nonfamily firms however family firms are worse organizational stewards than nonfamily firms they offer lower compensation invest less in employee training and exhibit higher voluntary turnover and lower labor productivity further and contrary to earlier research we find that financial practices in private family firms do not change over time and that the deleterious influence of family on employment practices rises with both firm age and with heightened family involvement together our findings suggest that a more nuanced understanding of stewardship and agency theory is needed to understand the impact of family on the governance of private firms

working in family firms paid less but more secure evidence from french matched employer employee data the authors study compensation packages in family owned and nonfamily owned firms using french matched employer employee data they first show that family firms pay on average lower wages part of this wage gap is attributable to low wage workers sorting into family firms and high wage workers sorting into nonfamily firms however they also find evidence that company wage policies differ according to ownership status so that the same worker is paid differently under family and nonfamily firm ownership in addition family firms are characterized by lower job insecurity as measured by lower dismissal rates family firms also appear to rely less on dismissals and more on hiring reductions than do nonfamily firms when they downsize the authors show that compensating wage differentials account for a substantial part of the inverse relationship between the family nonfamily gaps in wages and job security

come aboard exploring the effects of directorships in the executive labor market in this study we examine the following question what do executives gain from serving on boards we propose that board service benefits non ceo level executives in the executive labor market by acting as a certification mechanism and by providing access to unique knowledge skills and connections we argue that non ceo executives who gain directorships will be more likely to be promoted to ceo both inside and outside their home firm will be more likely to be promoted internally and will receive higher pay from their home firms to test our ideas we employ propensity score matching to construct a longitudinal sample of 2 104 top executives of large publicly traded companies in the united states over the period 1996 to 2012 the results provide consistent support for our theory

no money no honey financial versus knowledge and demand constraints on innovation the paper adds to the literature on the barriers to innovation in two ways first we assess comparatively what mostly constrains firms ability to translate investment in innovation activity into new products and processes whether it is mainly finance as most of the literature would suggest or whether it is mostly knowledge and market related aspects second we suggest a method to correct for the sample selection bias that often affects empirical contributions to this scholarship by filtering out firms that are not interested in innovation from those that struggle to engage in it we obtain a relevant sample of potential innovators which allows us to analyse the comparative effect of financial and non financial barriers on innovation success we find that demand side factors particularly concentrated market structure and lack of demand are as important as financial constraints in determining firms innovation failures this evidence redirects attention from financial to non financial barriers by considering traditional demand market structure and regulation factors involved in reduced firm innovation performance the empirical analysis is based on an unbalanced panel of firm level data from four waves of the uk community innovation survey cis between 2002 and 2010 merged with data from the uk business structure database

explicit lagrange multiplier for firms facing a debt ceiling constraint abstract this paper provides the explicit expression of investment facing a binding debt ceiling and the explicit expression of the lagrange multipliers related to the binding debt ceiling constraint this result allows us to check for misspecification of the parameterizations of these lagrange multipliers used in euler investment equations tests during the 1990 s

the ownership structure contingency in the sequential international entry mode decision process family owners and institutional investors in family dominant versus family influenced firms extending our understanding of family firms and international business research with respect to entry mode decisions this study explains how entry mode choice is the product of a sequential decision making process with an important ownership structure contingency we propose that firms with a dominant family owner family dominant firms prefer low equity ownership as their entry mode for the purpose of preserving their socioemotional wealth their preference is persistent even when the institutional investors are the dominant shareholders in the firm family influenced firms this nuanced examination of the role family values play in the entry mode decision extends our understanding of how family firms enter international markets

zeros and lumps in investment empirical evidence on irreversibilities and nonconvexities the objective of this paper is to investigate if and how capital adjustment departs from the smooth pattern implied by standard model based on convex adjustment costs using norwegian micro data we start by documenting the intermittent and lumpy nature of investment rates we then present two pieces of econometric evidence on these issues first we estimate a discrete hazard model to determine the probability of having an episode of high investment conditional on the length of the interval from the last high investment episode second we estimate a switching regression model that allows for the response of the investment rate to fundamentals to differ across regimes in both cases we investigate the aggregate implications of our results

investment decisions in troubled times a bayesian approach applied to brazilian firms abstract this study analyses the investment decision of 497 brazilian firms during a period of unstable macroeconomic conditions the role of financial constraints is considered in a bayesian econometric model we estimate three different models and the results indicate the presence of financial restrictions especially for capital intensive firms the recursive predictive density criterion indicates that the most preferred model is the one in which firm specific effects are correlated with cash flow financial restrictions are more important for capital intensive firms probably due to their lower profitability indexes higher fixed costs and higher degree of property diversification

diagram for a small planet the production and ecosystem possibilities curve abstract with the development of the gpi there is now an ecological alternative to gdp for measuring a country s economic performance but we still lack an ecological alternative to the ppc for illustrating a country s economic problem the diagram suggested here illustrates a country s production and ecosystem possibilities including climate stability flood control carbon sequestration aquifer recharge scenery recreation biological diversity and so on burning a rainforest to clear the land shifts a country s ppc outward giving the visual impression of an unmitigated improvement but such development causes a movement along the country s pepc as ecosystem services are transformed into gdp the slope of the pepc is the marginal rate of transformation which equals the ratio of the land s marginal marketable product to its marginal ecosystem product changes in technology create substitution and income effects that help explain the enclosure movement and the environmental kuznets curve much as employment of the human resource can be restrained to allow more leisure development of the natural resource can be restrained to preserve more ecosystem services commercial lobbying interests and rivalries for positional goods create distortions that move a country along its pepc to a materialistic misallocation with too little conservation an idealistic misallocation is also possible with too much preservation of the natural environment small is beautiful up to a point and that is evident in this diagram jacob viner s viner j 1937 studies in the theory of international trade harper and brothers new york analytical objections to the ppc are revived

peer monitoring and credit markets a major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced one partial solution is peer monitoring having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt peer monitoring is largely responsible for the successful financial performance of the grameen bank of bangladesh and of similar group lending programs elsewhere but peer monitoring has a cost it transfers risk from the bank which is in a better position to bear risk to the cosigner in a simple model of peer monitoring in a competitive credit market this article demonstrates that the transfer of risk leads to an improvement in borrowers welfare

stewardship or agency a social embeddedness reconciliation of conduct and performance in public family businesses two contradictory perspectives of family business conduct and performance are prominent in the literature the stewardship perspective argues that family business owners and managers will act as farsighted stewards of their companies investing generously in the business to enhance value for all stakeholders by contrast the agency and behavioral agency perspectives maintain that major family owners in catering to family self interest will underinvest in the firm avoid risk and extract resources this paper argues that both these views have application but under different circumstances determined in part by the degree to which the firm and its executive actors are embedded within the family and thus identify with its interests stewardship behavior will be less common and agency behavior will be more common the greater the number of family directors officers generations and votes and the more executives are susceptible to family influence these findings are supported among fortune 1000 firms as well as among the subsample of those firms that are family businesses

working capital and fixed investment new evidence on financing constraints this article presents new tests for finance constraints on investment by emphasizing the often neglected role of working capital as both a use and a source of funds the coefficient of endogenous working capital investment is negative in a fixed investment regression as expected if working capital competes with fixed investment for a limited pool of finance this finding addresses a criticism of previous research on finance constraints that cash flows may simply proxy shifts in investment demand in addition previous studies may have underestimated the impact of finance constraints on growth and investment because firms smooth fixed investment in the short run with working capital

corporate structure liquidity and investment evidence from japanese industrial groups this paper presents evidence suggesting that information and incentive problems in the capital market affect investment we come to this conclusion by examining two sets of japanese firms the first set has close financial ties to large japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm the second set of firms has weaker links to a main bank and presumably faces greater problems raising capital investment is more sensitive to liquidity for the second set of firms than for the first set the analysis also highlights the role of financial intermediaries in the investment process

deciding on large scale investments abstractthis study analyses the importance of investment factors across investment sizes and the frequency of large investment decisions within the firms we use data from 1442 investment decisions made by 226 brazilian firms between 1997 and 2010 the results indicate that the influence of investment factors is different for investments of different sizes the results also indicate that the increase in the frequency of large scale investment decisions made by the firm influences especially the role of cash flow diminishing its importance as an investment factor this result allows one to argue that probably firms more experienced in large scale decisions could be bolder in their decision making process relying less on the accumulation of funds through cash flow

the relation between firm growth and q with multiple capital goods theory and evidence from panel data on japanese firms we derive from a model of investment with multiple capital goods a one to one relation between the growth rate of the capital aggregate and the stock market based q we estimate the growth q relation using a panel of japanese manufacturing firms taking into account the endogeneity of q identification is achieved by combining the theoretical structure of the q model and an assumed serial correlation structure of the technology shock which is the error term in the growth q equation for early years of our sample cash flow has significant explanatory power over and above q the significance of cash flow disappears for more recent years for the heavy industry when japanese capital markets was liberalized the estimated q coefficient implies that the adjustment cost is less than a half of gross profits net of the adjustment cost

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

testing a causal model of corporate risk taking and performance the determinants of organizational risk taking and its impact on economic performance are critical issues in strategic management using a model that included risk performance performance expecta

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

investment cash flow sensitivities credit rationing and financing constraints in small and medium sized firms the controversy on whether investment cash flow sensitivity is a good indicator of financing constraints is still unsolved we apply a comprehensive approach by cross validating our analysis with both balance sheet and qualitative data on self declared credit rationing and financing constraints on a sample of mainly small and medium sized firms 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 taken on the basis of their credit risk models we use the qualitative information on firms which were denied additional credit to provide evidence relevant to the investment cash flow sensitivity debate the evidence shows that self declared credit rationing significantly discriminates between firms which possess or not such sensitivity while 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 supporting the more recent empirical evidence in this direction