often not made time-dependent (Kaplan and Zingales, 1997). Also, the average Tobin's Q may be an imprecise proxy for the unobservable marginal Tobin's Q (Hayashi, 1982). Internal funds could be a proxy for the profitability of investment and the positive sensitivity of investment to cash flow cannot solely be interpreted as capital and credit market imperfections but rather as firms with better liquidity also attaining superior investment possibilities (Hoshi et al., 1991; Schiantarelli, 1996).

An alternative approach to examine financing constraints is through estimating the Euler equation for the capital stock. The Euler equation uses a structural model to capture the influence of current expectations of future profitability on current investment decisions. Unlike the q-model, the Euler-equation approach measures how internal funds indirectly affect investment via a Lagrange multiplier and does not use the market value of q. The advantage of this is that future profitability, i.e. marginal q, does not need to be specified or observed. The major shortcoming of the Euler-equation approach is that it incorporates dynamics, which can complicate the   estimation and adapt needs, and like the q model of investment it needs to make some assumptions, like a geometric depreciation rate and convex adjustment costs.

Overall, the aforementioned approaches rely on strong theoretical assumptions, which in the event they are not met, render the models misspecified. Econometric advances have provided some solutions. For instance, Erickson and Whited (2000, 2002) proposed a class of GMM estimators that alleviate the measurement problems associated with Tobin’s q, by utilizing the information in the higher order moments of the regression variables. Also, in order to tackle the a priori classification of firms, Hansen (1999) introduces a threshold investment model based on a panel estimation method using a fixed-effects transformation where all parameters are determined simultaneously with the determination of the threshold value of the uncertainty measure. The main advantage of Hansen’s model is that the estimates of the thresholds are conditional on the model specification as a whole.

Nevertheless, these advances do not overcome all limitations. Remaining limitations, as highlighted by recent findings by Alti (2003) and Gomes (2001), include that investment-cash-flow sensitivities can be positive even in the absence of financial frictions. These findings illustrate the need for alternative empirical methodologies in identifying financing constraints. One alternative method is used by Demirgüç-Kunt and Maksimovic (1998) who estimate the degree of financing constraints by using a financial planning model. They obtain the maximum growth rate that firms could attain without access to long-term financing and then compare these predicted rates to the actual growth rates. Another empirical method is to depart from the standard model of reversible investment and combine the literature on financing constraints and with the literature on investment uncertainty. In this way, one can take into account investment irreversibility and the possibility to postpone the investment decision.

# **Demand side, survey techniques**

Even with these adjustments, such tests can typically only be done, however, for listed and large firms (since stock price data will be needed) and with much firm specific information (especially for the Euler equation models where a longer time series is needed). As a consequence, one is not able to do these studies for many developing countries (few have active stock markets) and definitely not for smaller firms. The approach for small (and large) firms has been to use surveys. This is also the typical approach used in developing countries. Enterprise surveys measure business perceptions of the investment climate, and can be used to analyze the link to job creation and productivity growth. Surveys provide quantitative indicators, also of financing constraints. A good example here is the World Business Environment Survey (WBES), administered to enterprises in 80 countries in late 1999 and early 2000, that utilized standard a core WBES survey in measuring constraints to access to finance, and has been extensive used to document the (lack of) financing constraints and the barriers to financing. In contrast, the Investment Climate Assessment (ICA), which has been conducted in 91 countries and is based on surveys of more than 58,000 firms, has not been much used for assessing financing constraints. This approach leads to statements such as “X percent of firms complain about lack of access to finance,” or 5