Does Financial Leverage Promote Sustainable Agricultural Productivity? Firm-Level Evidence from China Using a Risk-Adjusted TFP Approach

This study examines whether financial leverage promotes sustainable agricultural productivity by accounting for the trade-off between profitability and default risk. We construct a risk-adjusted total factor productivity (TFP) measure by incorporating default risk as an undesirable output into a slack-based DEA framework (USBM), with risk estimated via contingent claims analysis (CCA). Using panel data on Chinese listed agricultural firms, we find a robust inverted-U relationship between leverage and TFP, indicating an optimal leverage range. Mechanism analysis reveals a dual-channel effect: leverage improves productivity through profitability and reduced financing constraints at low levels but increases default risk and undermines financial sustainability at high levels. Decomposition results show that leverage promotes efficiency catch-up but inhibits frontier technological progress, implying a trade-off between short-term efficiency gains and long-term sustainability. Substantial heterogeneity across subsectors and market structures further suggests that optimal leverage is context-dependent. This study contributes by developing a risk-adjusted productivity framework, identifying the nonlinear effects of leverage on sustainable TFP, and providing micro-level evidence from agriculture in a developing economy. The findings offer implications for capital structure optimization and sustainable agricultural finance.