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Farm capital structure choice: theory and an empirical test

Author

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  • Feng Wu
  • Zhengfei Guan
  • Robert Myers

Abstract

Purpose - – The purpose of this paper is to provide a unified theoretical framework that explains farm capital structure choice. Design/methodology/approach - – The framework accommodates different credit access scenarios and heterogeneous risk profiles of borrowers. It recognizes that the costs of capital are endogenously determined, reflecting the degree of credit risk and accessibility to credit markets. Based on the proposed model and the comparative statics derived thereof, the paper empirically tests the impacts of different factors on capital structure choice. Findings - – Based on the theoretical framework, the paper derived the impacts of different factors on capital structure choice using comparative statics. Results suggest that the potential determinants of capital structure have varying effects at different ranges of leverage. Empirical evidence supports the theoretical model. Originality/value - – Despite all of previous work on various aspects of farm capital structure choice, a framework that encompasses each of the different assumptions and scenarios is still lacking. The theoretical model integrates credit risk models and accommodates endogenous cost of capital, providing a comprehensive framework for studying farm capital structure choice and its determinants. The results provide insights that could help policy makers and lenders develop effective instruments to manage, monitor, and influence the financial leverage of farms at different quantiles of debt ratio.

Suggested Citation

  • Feng Wu & Zhengfei Guan & Robert Myers, 2014. "Farm capital structure choice: theory and an empirical test," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 74(1), pages 115-132, April.
    • Handle: RePEc:eme:afrpps:v:74:y:2014:i:1:p:115-132
    DOI: 10.1108/AFR-08-2012-0041
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    Citations

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    Cited by:

    1. Krzysztof Firlej & Sebastian Kubala, 2021. "The Financial Determinants of Investment Level Based on the Direction of Production of Agricultural Enterprises in the European Union," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 140-152.
    2. Rakhal Sarker & Truc Phan & Yu Na Lee & Alfons Weersink, 2022. "Business Risk Management Program and risk‐balancing in Ontario hog sector: An empirical analysis," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 70(4), pages 287-304, December.
    3. Danuta Zawadzka & Agnieszka Strzelecka & Ewa Szafraniec-Siluta, 2021. "Debt as a Source of Financial Energy of the Farm—What Causes the Use of External Capital in Financing Agricultural Activity? A Model Approach," Energies, MDPI, vol. 14(14), pages 1-17, July.
    4. Tamirat, Aderajew AS & Trujillo-Barrera, Andres A. & Pennings, Joost M. E., 2018. "Do Profit Rates Converge? Evidence on the Persistence of Farm Profit in the Long-run," 2018 Annual Meeting, August 5-7, Washington, D.C. 273791, Agricultural and Applied Economics Association.

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