Does the investment opportunities bias affect the investment–cash flow sensitivities of unlisted SMEs?

Bert D’Espallier · Alessandra Guariglia

52 citations0/0 files storedEuropean Journal of Finance

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

Using a panel of 5999 Belgian small- and medium-sized enterprises (SMEs) over the period 2002–2008, we employ a Bayesian approach to derive firm-varying investment–cash flow sensitivities (ICFS) from reduced-form investment equations which include different measures of investment opportunities suitable for unlisted firms. We find that all our models yield similar ICFS, which are significantly related to a wide set of proxies for financing constraints and orthogonal to our measures of investment opportunities. These findings suggest that the ICFS of SMEs do not simply reflect investment opportunities. The investment opportunities bias may therefore have been overstated in previous literature.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1988Financing Constraints and Corporate Investment 1994The Benefits of Lending Relationships: Evidence from Small Business Data 1987Financing Constraints and Corporate Investment 2006Financial Constraints Risk 2004The Cash Flow Sensitivity of Cash 2006Small and medium-size enterprises: Access to finance as a growth constraint

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