IDEAS home Printed from https://ideas.repec.org/a/eee/jfpoli/v56y2015icp67-75.html

Do decoupled payments affect investment financing constraints? Evidence from Irish agriculture

Author

Listed:
  • O’Toole, Conor
  • Hennessy, Thia

Abstract

This paper empirically tests whether decoupled subsidies decrease investment financing constraints faced by farms. Using a panel dataset from Ireland over the period 2005–2010, we test whether the CAP decoupled subsidy payments reduce credit constraints by altering the risk profile of farm earnings. We test for financing constraints in a neoclassical Q model using investment-cash flow sensitivities. Our econometric methodology controls for censoring, heterogeneity and endogeneity. We find that decoupled subsidies do reduce credit constraints. The effect is greater for farms that face higher constraints: dairy farmers and younger farms. This evidence suggests that, over and above the effect on production indicated in previous research, decoupling affects farm investment through financial channels.

Suggested Citation

  • O’Toole, Conor & Hennessy, Thia, 2015. "Do decoupled payments affect investment financing constraints? Evidence from Irish agriculture," Food Policy, Elsevier, vol. 56(C), pages 67-75.
    • Handle: RePEc:eee:jfpoli:v:56:y:2015:i:c:p:67-75
    DOI: 10.1016/j.foodpol.2015.07.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0306919215000822
    Download Restriction: Full text may be restricted for ScienceDirect subscribers
    File URL: https://libkey.io/10.1016/j.foodpol.2015.07.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or

    for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chirinko, Robert S, 1993. "Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1875-1911, December.
    2. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
    3. Holton, Sarah & McCann, Fergal, 2012. "Irish SME credit supply and demand: comparisons across surveys and countries," Economic Letters 08/EL/12, Central Bank of Ireland.
    4. Laure Latruffe & Sophia Davidova & Elodie Douarin & Matthew Gorton, 2010. "Farm Expansion in Lithuania after Accession to the EU: The Role of CAP Payments in Alleviating Potential Credit Constraints," Europe-Asia Studies, Taylor & Francis Journals, vol. 62(2), pages 351-365.
    5. Timothy Erickson & Toni M. Whited, 2010. "Erratum: Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1252-1257.
    6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    7. Petra Gerlach-Kristen & Brian O'Connell & Conor O'Toole, 2015. "Do Credit Constraints Affect SME Investment and Employment?," The Economic and Social Review, Economic and Social Studies, vol. 46(1), pages 51-86.
    8. Andrius Kazukauskas & Carol Newman & Johannes Sauer, 2014. "The impact of decoupled subsidies on productivity in agriculture: a cross-country analysis using microdata," Agricultural Economics, International Association of Agricultural Economists, vol. 45(3), pages 327-336, May.
    9. Stephen Bond & Julie Ann Elston & Jacques Mairesse & Benoît Mulkay, 2003. "Financial Factors and Investment in Belgium, France, Germany, and the United Kingdom: A Comparison Using Company Panel Data," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 153-165, February.
    10. Galindo, Arturo & Schiantarelli, Fabio & Weiss, Andrew, 2007. "Does financial liberalization improve the allocation of investment?: Micro-evidence from developing countries," Journal of Development Economics, Elsevier, vol. 83(2), pages 562-587, July.
    11. James Vercammen, 2007. "Farm bankruptcy risk as a link between direct payments and agricultural investment," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 34(4), pages 479-500, December.
    12. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    13. Moro, Daniele & Sckokai, Paolo, 2013. "The impact of decoupled payments on farm choices: Conceptual and methodological challenges," Food Policy, Elsevier, vol. 41(C), pages 28-38.
    14. Ryan, Robert M. & O’Toole, Conor M. & McCann, Fergal, 2014. "Does bank market power affect SME financing constraints?," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 495-505.
    15. Fabio R. Chaddad & Michael L. Cook & Thomas Heckelei, 2005. "Testing for the Presence of Financial Constraints in US Agricultural Cooperatives: An Investment Behaviour Approach," Journal of Agricultural Economics, Wiley Blackwell, vol. 56(3), pages 385-397, December.
    16. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
    17. Hennessy, Christopher A. & Levy, Amnon & Whited, Toni M., 2007. "Testing Q theory with financing frictions," Journal of Financial Economics, Elsevier, vol. 83(3), pages 691-717, March.
    18. Huang, Zhangkai, 2003. "Evidence of a bank lending channel in the UK," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 491-510, March.
    19. Gallerani, Vittorio & Gomez y Paloma, Sergio & Raggi, Meri & Viaggi, Davide, 2008. "Modelling The Effect Of Eu Policy Reforms On Farm Investment Behaviour," 107th Seminar, January 30-February 1, 2008, Sevilla, Spain 6444, European Association of Agricultural Economists.
    20. 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.
    21. Jeremy G. Weber & Nigel Key, 2012. "How much Do Decoupled Payments Affect Production? An Instrumental Variable Approach with Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 52-66.
    22. Sergo Gomez i Paloma & Vittorio Galerani & Meri Ragi & Davide Viagi & Dimitar Nikolov, 2008. "Methodological Approach for Evaluation ff Investment Behavior of Farmers in Different Development Scenarios," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 81-96.
    23. Davide Viaggi & Meri Raggi & Vittorio Gallerani & Sergio Paloma, 2010. "The impact of EU common agricultural policy decoupling on farm households: Income vs. investment effects," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 45(3), pages 188-192, May.
    24. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
    25. Paolo Sckokai & Daniele Moro, 2009. "Modelling the impact of the CAP Single Farm Payment on farm investment and output," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 36(3), pages 395-423, September.
    26. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    27. Teresa Serra & Spiro Stefanou & José M. Gil & Allen Featherstone, 2009. "Investment rigidity and policy measures," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 36(1), pages 103-120, March.
    28. Guariglia, Alessandra & Mateut, Simona, 2010. "Inventory investment, global engagement, and financial constraints in the UK: Evidence from micro data," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 239-250, March.
    29. Andrew M. Jones & José M. Labeaga, 2003. "Individual heterogeneity and censoring in panel data estimates of tobacco expenditure," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(2), pages 157-177.
    30. Barry K. Goodwin & Ashok K. Mishra, 2006. "Are “Decoupled” Farm Program Payments Really Decoupled? An Empirical Evaluation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(1), pages 73-89.
    31. Lawless, Martina & O’Connell, Brian & O’Toole, Conor, 2015. "SME recovery following a financial crisis: Does debt overhang matter?," Journal of Financial Stability, Elsevier, vol. 19(C), pages 45-59.
    32. Oecd, 2006. "Dynamic Econometric Models of Crop Investment in Manitoba and Production under Risk Aversion and Uncertainty," OECD Papers, OECD Publishing, vol. 5(11), pages 1-55.
    33. Alan Matthews & Carol Newman & Fiona Thorne, 2006. "Productivity in Irish Agriculture," Working Papers 0614, Rural Economy and Development Programme,Teagasc.
    34. Bougheas, Spiros & Mizen, Paul & Yalcin, Cihan, 2006. "Access to external finance: Theory and evidence on the impact of monetary policy and firm-specific characteristics," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 199-227, January.
    35. David A. Hennessy, 1998. "The Production Effects of Agricultural Income Support Policies under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 46-57.
    36. Paolo Sckokai & Jesús Antón, 2005. "The Degree of Decoupling of Area Payments for Arable Crops in the European Union," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(5), pages 1220-1228.
    37. repec:bla:jfinan:v:59:y:2004:i:4:p:1717-1742 is not listed on IDEAS
    38. Conor M. O'Toole & Carol Newman & Thia Hennessy, 2011. "The role of fundamental Q and financing frictions in agricultural investment decisions: an analysis pre and post financial crisis," Trinity Economics Papers tep0311, Trinity College Dublin, Department of Economics.
    39. Barry K. Goodwin & Ashok K. Mishra, 2005. "Another Look at Decoupling: Additional Evidence on the Production Effects of Direct Payments," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(5), pages 1200-1210.
    40. Fabienne Femenia & Alexandre Gohin & Alain Carpentier, 2010. "The Decoupling of Farm Programs: Revisiting the Wealth Effect," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(3), pages 836-848.
    41. Conor M. O'Toole & Carol Newman & Thia Hennessy, 2014. "Financing Constraints and Agricultural Investment: Effects of the Irish Financial Crisis," Journal of Agricultural Economics, Wiley Blackwell, vol. 65(1), pages 152-176, January.
    42. Viaggi, Davide & Raggi, Meri & Gomez y Paloma, Sergio, 2011. "Farm-household investment behaviour and the CAP decoupling: Methodological issues in assessing policy impacts," Journal of Policy Modeling, Elsevier, vol. 33(1), pages 127-145, January.
    43. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    44. Whited, Toni M, 1998. "Why Do Investment Euler Equations Fail?," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 479-488, October.
    45. Petrick, Martin, 2004. "Farm investment, credit rationing, and governmentally promoted credit access in Poland: a cross-sectional analysis," Food Policy, Elsevier, vol. 29(3), pages 275-294, June.
    46. Ralph Bierlen & Allen M. Featherstone, 1998. "Fundamental q, Cash Flow, and Investment: Evidence from Farm Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 427-435, August.
    47. Martin Petrick, 2005. "Empirical measurement of credit rationing in agriculture: a methodological survey," Agricultural Economics, International Association of Agricultural Economists, vol. 33(2), pages 191-203, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Conor O'Toole & Carol Newman, 2012. "Investment Financing and Financial Development: Firm Level Evidence from Vietnam," The Institute for International Integration Studies Discussion Paper Series iiisdp409, IIIS.
    2. O'Toole, Conor M. & Morgenroth, Edgar L.W. & Ha, Thuy T., 2016. "Investment efficiency, state-owned enterprises and privatisation: Evidence from Viet Nam in Transition," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 93-108.
    3. Moro, Daniele & Sckokai, Paolo, 2013. "The impact of decoupled payments on farm choices: Conceptual and methodological challenges," Food Policy, Elsevier, vol. 41(C), pages 28-38.
    4. Marian Rizov & Jan Pokrivcak & Pavel Ciaian, 2013. "CAP Subsidies and Productivity of the EU Farms," Journal of Agricultural Economics, Wiley Blackwell, vol. 64(3), pages 537-557, September.
    5. Ann E. Harrison & Inessa Love & Margaret S. McMillan, 2022. "Global capital flows and financing constraints," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 8, pages 181-213, World Scientific Publishing Co. Pte. Ltd..
    6. Kehinde Oluseyi Olagunju & Myles Patton & Siyi Feng, 2020. "Estimating the Impact of Decoupled Payments on Farm Production in Northern Ireland: An Instrumental Variable Fixed Effect Approach," Sustainability, MDPI, vol. 12(8), pages 1-17, April.
    7. Martinez-Cillero, Maria & Lawless, Martina & O'Toole, Conor, 2023. "Analysing SME investment, financing constraints and its determinants. A stochastic frontier approach," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 578-588.
    8. Viaggi, Davide & Raggi, Meri & Gomez y Paloma, Sergio, 2011. "Farm-household investment behaviour and the CAP decoupling: Methodological issues in assessing policy impacts," Journal of Policy Modeling, Elsevier, vol. 33(1), pages 127-145, January.
    9. Hüttel, Silke & Mußhoff, Oliver & Odening, Martin & Zinych, Nataliya, 2008. "Estimating investment equations in imperfect capital markets," SFB 649 Discussion Papers 2008-016, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    10. Jean-Bernard Chatelain, 2002. "Structural modelling of investment and financial constraints: Where do we stand?," Working Paper Research 28, National Bank of Belgium.
    11. Ryan, Robert M. & O’Toole, Conor M. & McCann, Fergal, 2014. "Does bank market power affect SME financing constraints?," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 495-505.
    12. Wawrzyniec Czubak & Krzysztof Piotr Pawłowski, 2024. "The Impact of Agricultural Investments on the Economic Efficiency of Production Factors: An Empirical Study of the Wielkopolska Voivodeship," Agriculture, MDPI, vol. 14(12), pages 1-16, December.
    13. Musson, Anne & Rousselière, Damien, 2020. "Identifying the impact of crisis on cooperative capital constraint. A short note on French craftsmen cooperatives," Finance Research Letters, Elsevier, vol. 35(C).
    14. Conor M. O'Toole & Carol Newman & Thia Hennessy, 2011. "The role of investment, fundamental Q and financing frictions in agricultural investment decisions: an analysis pre and post financial crisis," Working Papers 1101, Rural Economy and Development Programme,Teagasc.
    15. Andreas Wagener & Juliane Zenker, 2021. "Decoupled but Not Neutral: The Effects of Counter‐Cyclical Cash Transfers on Investment and Incomes in Rural Thailand†," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(5), pages 1637-1660, October.
    16. Khan, Habib Hussain & Qureshi, Fiza & Jamali, Dima, 2025. "Digital disruption in financing: Are fintech and bigtech credit reshaping corporate access to capital?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 103(C).
    17. Jean-Bernard Chatelain, 2003. "Structural modelling of financial constraints on investment: where do we stand?," Chapters, in: Paul Butzen & Catherine Fuss (ed.), Firms’ Investment and Finance Decisions, chapter 2, pages 40-58, Edward Elgar Publishing.
    18. Pierre Boulanger & Kirsten Boysen-Urban & George Philippidis, 2021. "European Union Agricultural Support ‘Coupling’ in Simulation Modelling: Measuring the Sustainability Impacts," Sustainability, MDPI, vol. 13(6), pages 1-17, March.
    19. Robert G. Chambers & Daniel C. Voica, 2017. "“Decoupled” Farm Program Payments are Really Decoupled: The Theory," American Journal of Agricultural Economics, John Wiley & Sons, vol. 99(3), pages 773-782, April.
    20. Edward Knapp & Jason Loughrey, 2017. "The single farm payment and income risk in Irish farms 2005–2013," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 5(1), pages 1-15, December.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfpoli:v:56:y:2015:i:c:p:67-75. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/foodpol .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.