Fazzari, Hubbard, and Petersen respond to Kaplan and Zingales' critique of investment-cash flow sensitivities as a measure of financing constraints. They argue that Kaplan and Zingales' theoretical model does not accurately represent the approach used in previous research, making their critique ineffective. Additionally, they point out flaws in Kaplan and Zingales' empirical classification system, which fails to properly identify whether firms are constrained and the relative degree of constraints across firms. They conclude that their results do not support their conclusions about the usefulness of investment-cash flow sensitivities. Kaplan and Zingales argue that investment-cash flow sensitivities do not provide useful evidence about financing constraints. They use a subset of the same firms and regressions as Fazzari, Hubbard, and Petersen (FHP) and claim FHP is the parent of all papers in this literature. Based on a simple theoretical model, Kaplan and Zingales conclude that the investment-cash flow sensitivity criterion as a measure of financial constraints is not well-grounded in theory. Fazzari, Hubbard, and Petersen show that the KZ model does not capture the theoretical approach used in FHP and many subsequent studies. Most of the KZ paper attempts to show that empirical investment-cash flow sensitivities do not increase monotonically with the degree of financing constraints within the 49 low-dividend firms from the FHP sample. They explain why the KZ classification of the degree of constraints is flawed in identifying both whether or not firms are constrained (absolute constraints) as well as the relative degree of constraints across firms. As a result, they argue that there is no expected ex ante pattern for the investment-cash flow sensitivities across the KZ categories, making their empirical results uninformative about the usefulness of investment-cash flow sensitivities. The KZ model focuses on the second derivative of investment with respect to internal financing, d²I/dW², and concludes that the theoretical foundation of previous research is weak because dI/dW may not fall as the degree of financing constraints declines (with larger W). Fazzari, Hubbard, and Petersen argue that the focus on d²I/dW² does not provide an effective critique of the literature because most studies do not use the level of W to classify firms. Instead, FHP and much of the literature classify firms according to a priori criteria designed to give large differences in the slope of the external financing schedule, C₁₁, across groups. The necessary condition for dI/dW to be larger for constrained firms is C₁₁^Constrained/C₁₁^Unconstrained > F₁₁^Constrained/F₁₁^Unconstrained. Fazzari, Hubbard, and Petersen argue that as long as researchers separate firms by a priori criteria that result in C₁₁^Constrained > C₁₁^Unconstrained in the relevant range, the comparisonFazzari, Hubbard, and Petersen respond to Kaplan and Zingales' critique of investment-cash flow sensitivities as a measure of financing constraints. They argue that Kaplan and Zingales' theoretical model does not accurately represent the approach used in previous research, making their critique ineffective. Additionally, they point out flaws in Kaplan and Zingales' empirical classification system, which fails to properly identify whether firms are constrained and the relative degree of constraints across firms. They conclude that their results do not support their conclusions about the usefulness of investment-cash flow sensitivities. Kaplan and Zingales argue that investment-cash flow sensitivities do not provide useful evidence about financing constraints. They use a subset of the same firms and regressions as Fazzari, Hubbard, and Petersen (FHP) and claim FHP is the parent of all papers in this literature. Based on a simple theoretical model, Kaplan and Zingales conclude that the investment-cash flow sensitivity criterion as a measure of financial constraints is not well-grounded in theory. Fazzari, Hubbard, and Petersen show that the KZ model does not capture the theoretical approach used in FHP and many subsequent studies. Most of the KZ paper attempts to show that empirical investment-cash flow sensitivities do not increase monotonically with the degree of financing constraints within the 49 low-dividend firms from the FHP sample. They explain why the KZ classification of the degree of constraints is flawed in identifying both whether or not firms are constrained (absolute constraints) as well as the relative degree of constraints across firms. As a result, they argue that there is no expected ex ante pattern for the investment-cash flow sensitivities across the KZ categories, making their empirical results uninformative about the usefulness of investment-cash flow sensitivities. The KZ model focuses on the second derivative of investment with respect to internal financing, d²I/dW², and concludes that the theoretical foundation of previous research is weak because dI/dW may not fall as the degree of financing constraints declines (with larger W). Fazzari, Hubbard, and Petersen argue that the focus on d²I/dW² does not provide an effective critique of the literature because most studies do not use the level of W to classify firms. Instead, FHP and much of the literature classify firms according to a priori criteria designed to give large differences in the slope of the external financing schedule, C₁₁, across groups. The necessary condition for dI/dW to be larger for constrained firms is C₁₁^Constrained/C₁₁^Unconstrained > F₁₁^Constrained/F₁₁^Unconstrained. Fazzari, Hubbard, and Petersen argue that as long as researchers separate firms by a priori criteria that result in C₁₁^Constrained > C₁₁^Unconstrained in the relevant range, the comparison