Due to capital market imperfections, external financing is more expensive than internal financing and the effects of internal fund availability on investment outlay is greater for financially constrained firms. Consistent with this notion, most empirical research on financing constraints finds evidence that firms facing a higher gap between the internal and external cost of funds exhibit larger investment-cash flow sensitivities Despite such evidence, however, there are still conflicting views on the caUSeS of the sensitivities and on their cross-sectional differences. For example, Fazzari , Hubbard, and Petersen (FHP, 1988) find evidence that more financially constrained firms show higher investment-cash flow sensitivities whereas Kaplan and Zingales (1997) find just the opposite evidence using a subset of FHP's data. Kaplan and Zingales argue that these sensitivities are not a useful measure of financing constraints as claimed by FHP In this study, we take into consideration managerial conservatism in external financing in addition to the cost gap between internal and external financing caused by asymmetric information. While we measure the investment-cash flow sensitivity employing the con ventional panel data model , we carefully classify firms according to the degrees of asymmetric information and/or managerial conservatism, applying both univariate and multivariate classification methods. Using Korean firms. eight-Year panel data in the period of 1990 to 1997, we find evidence that managerial conservatism is a more important factor than asymmetric information in explaining the cross-sectional differences of the sensitivities Furthermore, conservative firms show significantly larger sensitivities than aggressive firms.