Abstract
The aim of the paper is to investigate the impact of financial constraints on investment behaviour of firms in Kosovo. This article uses data from the 2005 survey of small and medium-sized enterprises (SMEs) conducted by Riinvest Institute in order to test the investment-cash flow sensitivity hypothesis. For this purpose we use two regression techniques. First, we use ordinary least square (OLS) regression to estimate an investment equation model in order to test sensitivity of investment to cash flow. Then, we estimate a switching regression model as a robustness check in order to control for possible methodological biases of other studies. Econometric results do not support investment-cash flow sensitivity hypothesis after controlling for different sub samples of firms (i.e., firms that received a credit, firms that did not ask for credit and firms that were refused by banks) and methods.
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