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

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.