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

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Author Info

  • Conor M. O'Toole

    ()
    (Department of Economics, Trinity College Dublin)

  • Carol Newman

    ()
    (Department of Economics, Trinity College Dublin)

  • Thia Hennessy

    ()
    (Rural Economy Development Programme, Teagasc)

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 off-farm capital to fund on-farm investment.

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File URL: http://www.tcd.ie/Economics/TEP/2011/TEP0311.pdf
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Bibliographic Info

Paper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number tep0311.

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Length: 42 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:tcd:tcduee:tep0311

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Postal: Trinity College, Dublin 2
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Related research

Keywords: Credit Constraints; Firm Level Investment; Tobin's Q; Debt;

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Cited by:
  1. Conor O'Toole & Thia Hennessy, 2013. "Do decoupled payments affect investment financing constraints? Evidence from Irish agriculture," Trinity Economics Papers tep0113, Trinity College Dublin, Department of Economics.

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