Does the Investment Opportunities Bias Affect the Investment-Cash Flow Sensitivities of Unlisted SMEs?

Using a panel of 5,999 small and medium-sized Belgian enterprises (SMEs) over the period 2002-2008, we identify three measures of investment opportunities suitable for unlisted firms. We then estimate firm-varying investment-cash flow sensitivities (ICFS) from reduced-form investment equations that include these measures, and compare them with those derived from a model that does not control for investment opportunities. We find that all our models yield similar ICFS estimates, which are significantly related to a wide set of proxies for financing constraints. 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.