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

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Charles J. Hadlock ; Joshua R. Pierce (2010)
  • Journal: The Review of Financial Studies, volume 23, issue 5, pages 1,909-1,940
  • Related identifiers: doi: 10.1093/rfs/hhq009

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. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail:, Oxford University Press.
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