Jaan MassoAbstract: Lack of financing is arguably the main obstacle for making profitable investments in transition economies. In this paper we investigate whether there is underinvestment due to financing constraints in Estonian manufacturing firms. Firm level panel data from 1995 through 1998 with several items from financial statements were used. The unique data includes many very small firms with assets less than 1 million USD that are often not explored in empirical studies. The existence of liquidity constraints was tested with estimating regression coefficients of inside - firm financing from reduced form investment regressions and using the investment Euler equation. Results show that internal finance played a bigger role for investments made by small firms and firms owned by domestic (non-foreign) capital. The only exception is that in the Euler equation, cash flow influenced investments more for small than for large foreign firms. The results imply that foreign direct investments and lower corporate income taxes can promote investments through the relaxation of liquidity constraints.Keywords: Financing constraints; Investment; Cash flow; EstoniaJEL classification: G31, E22