Financial market failure, originated from asymmetric information, increase the cost of external funds that firms use to invest, and there will be a gap between the costs of internal and external finance. In this case,investment cost for firm increases because of either firms’can not obtain external funds or they can obtainexternal funds with high cost. This situation defined as financial constraint affects firms’ investment, aggregate investment and welfare in economy ultimately.In this study, it is aimed to analyze the effect of financial constraints on firm investment and to evaluate policy recommendations developed for eliminate these possible unfavorable effects. In this framework, this study concentrates on firms that operate in Turkish manufacturing industry and that are quoted in Borsa İstanbul (BİST). A balanced panel data set that contains 125 firms and ranges from 1998 to 2010 is used. Findings reveal that, firms operating in Turkish manufacturing industry are faced with financial constraint and their investments are adversely affected by financial constraints. Accordingly, these firms are severely dependent on internal funds (cash flows) when financing their investment.