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Financing strategies under combined capital structure theories: a farm-level simulation analysis

Author

Listed:
  • Jianmei Zhao
  • Peter J. Barry
  • Gary D. Schnitkey

Abstract

A stochastic, multi-period simulation model is developed based on the prevalent capital structure theories, in searching for and identifying an optimal combination of related financing strategies. The model reflects both conceptual and empirical implications of the pecking order, trade-off and signalling theories on farm business financing, investment, and expansion process. The comparisons of simulation output indicate that farm businesses could expand at a moderate speed accompanied by financial health when they concurrently adopt these financing tactics. Pecking order financing benefits short-term financial management, trade-off strategy effectively adjust farm capital structure, and the signaling theory enables the adoption of risk-adjusted interest rate policies between the farm borrower and the lender.

Suggested Citation

  • Jianmei Zhao & Peter J. Barry & Gary D. Schnitkey, 2008. "Financing strategies under combined capital structure theories: a farm-level simulation analysis," Agricultural Finance Review, Emerald Group Publishing, vol. 68(2), pages 321-338, November.
  • Handle: RePEc:eme:afrpps:v:68:y:2008:i:2:p:321-338
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