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The role of fundamental Q and financing frictions in agricultural investment decisions: an analysis pre and post financial crisis

Author

Listed:
  • Conor M. O'Toole

    () (Department of Economics, Trinity College Dublin)

  • Carol Newman

    () (Department of Economics, Trinity College Dublin)

  • Thia Hennessy

    () (Rural Economy Development Programme, Teagasc)

Abstract

This paper uses a fundamental Q model of investment to consider the role played by financing frictions in agricultural investment decisions, controlling econometrically for censoring, heterogeneity and errors-in-variables. Our findings suggest that farmer's investment decisions are not driven by market fundamentals. We find some evidence that debt overhang restricts investment but investment is not dependent on liquidity or internal funds. The role of financing frictions in determining investment decisions changes in the post-financial crisis period when debt overhang becomes a significant impediment to farm investment. The evidence suggests that farmers increasingly rely on internal liquidity to drive investment. Finally, we find no evidence that farmers use off-farm capital to fund on-farm investment.

Suggested Citation

  • 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.
  • Handle: RePEc:tcd:tcduee:tep0311
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    File URL: http://www.tcd.ie/Economics/TEP/2011/TEP0311.pdf
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    Cited by:

    1. 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.

    More about this item

    Keywords

    Credit Constraints; Firm Level Investment; Tobin's Q; Debt;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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