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The role of financing frictions in agricultural investment decisions: an analysis pre and post financial crisis

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  • O'Toole, Conor M.
  • Newman, Carol F.
  • Hennessy, Thia C.

Abstract

This paper uses a fundamental Q model of investment to consider the role played by financing frictions in agricultural investment decisions, controlling econometrically for censoring, heterogeneity and errors-in-variables. Our findings suggest that farmer's investment decisions are not driven by market fundamentals. We find some evidence that debt overhang restricts investment but investment is not dependent on liquidity or internal funds. The role of financing frictions in determining investment decisions changes in the post-financial crisis period when debt overhang becomes a significant impediment to farm investment. The evidence suggests that farmers increasingly rely on internal liquidity to drive investment. Finally, we find no evidence that farmers use on-farm capital to fund on-farm investment.

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File URL: http://purl.umn.edu/114568
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Paper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 114568.

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Date of creation: 02 Sep 2011
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Handle: RePEc:ags:eaae11:114568

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Keywords: Credit Constraints; Firm Level Investment; Tobin's Q; Debt; Agricultural Finance; G31; G32; F34;

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  1. Catherine Benjamin & Euan Phimister, 2002. "Does Capital Market Structure Affect Farm Investment? A Comparison using French and British Farm-Level Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 1115-1129.
  2. Gilchrist, S. & Himmelberg, C.P., 1995. "Evidence on the Role of Cash Flow for Investment," Papers 95-29, Columbia - Graduate School of Business.
  3. Kenneth Y. Chay & James L. Powell, 2001. "Semiparametric Censored Regression Models," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 29-42, Fall.
  4. Khan, Shakeeb & Powell, James L., 2001. "Two-step estimation of semiparametric censored regression models," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 73-110, July.
  5. James Tobin & William C. Brainard, 1976. "Asset Markets and the Cost of Capital," Cowles Foundation Discussion Papers 427, Cowles Foundation for Research in Economics, Yale University.
  6. Silke Hüttel & Oliver Mu�hoff & Martin Odening, 2010. "Investment reluctance: irreversibility or imperfect capital markets?," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 37(1), pages 51-76, March.
  7. James Vercammen, 2007. "Farm bankruptcy risk as a link between direct payments and agricultural investment," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 34(4), pages 479-500, December.
  8. Paolo Sckokai & Daniele Moro, 2009. "Modelling the impact of the CAP Single Farm Payment on farm investment and output," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 36(3), pages 395-423, September.
  9. Powell, James L, 1986. "Symmetrically Trimmed Least Squares Estimation for Tobit Models," Econometrica, Econometric Society, vol. 54(6), pages 1435-60, November.
  10. Conor Keelan & Carol Newman & Maeve Henchion, 2008. "Quick-service expenditure in Ireland: parametric vs. semiparametric analysis," Applied Economics, Taylor & Francis Journals, vol. 40(20), pages 2659-2669.
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