New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index
Charles J. Hadlock
Michigan State University
Joshua R. Pierce
University of South Carolina
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.