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A Dynamic Model Of Capital Structure For The Noncorporate Firm

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  • Karp, Larry S.
  • Collins, Robert A.

Abstract

A dynamic model of capital structure for the noncorporate farm is developed and analyzed. The model examines the effect on optimal capital structure of (1) bankruptcy risk, (2) the difference between the riskless rate and the expected return in agriculture, and (3) the difference between the off-farm wage and the implicit on-farm wage. If the difference between the wages is O, a constant leverage is optimal under reasonable circumstances. The model predicts that older farmers require more leverage to induce them to remain in farming and that they tend to reduce their leverage as retirement approaches. The model is tested with cross sectional data.

Suggested Citation

  • Karp, Larry S. & Collins, Robert A., 1988. "A Dynamic Model Of Capital Structure For The Noncorporate Firm," 1988 Annual Meeting, August 1-3, Knoxville, Tennessee 270420, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea88:270420
    DOI: 10.22004/ag.econ.270420
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    References listed on IDEAS

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    1. Hellwig, Martin F, 1981. "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 71(1), pages 155-170, March.
    2. Innes, Robert, 1987. "Agency Costs, Farm Debt And Foreclosure: Positive And Policy Issues," Working Papers 225811, University of California, Davis, Department of Agricultural and Resource Economics.
    3. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    5. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    6. C. S. Thraen & J. W. Hammond & B. M. Buxton, 1978. "Estimating Components of Demand Elasticities from Cross-Sectional Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 60(4), pages 674-677.
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