Bank Loan, Financial Leverage and Farm Productivity: Evidence from the Russian Far East

Does capital structure matter for farms productivity? Do bank loans increase or decrease farms efficiency? To address this question, I use farm-level data for 2014–2020 from Amur region, which is one of the most typical Russian regions in terms of agricultural development. I find some evidence of a negative correlation between financial leverage and total factor productivity in Amur Oblast farms. I also observe a negative correlation between financial leverage and partial productivity measures such as labor productivity, crop yield, and return on fixed assets. The negative relationship between enterprise productivity and the share of loans in liabilities can be explained, on the one hand, by the fact that bank loans are more often used by struggling, inefficient agricultural enterprises, i. e. adverse selection may take place. On the other hand, the negative relationship between firm productivity and bank credit may be due to the non-market nature of the credit they receive, with the government subsidizing the interest rate and/or guaranteeing the loan obligations. As a result, farms face soft budget constraints that reduce the incentives of owners and management to improve farm efficiency. The two proposed explanations (adverse selection and soft budget constraints) are not mutually exclusive, but rather complementary