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The role of investment, 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

    () (Department of Agricultural Economics, 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 in- vestment 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 nancing 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 investment, fundamental Q and financing frictions in agricultural investment decisions: an analysis pre and post financial crisis," Working Papers 1101, Rural Economy and Development Programme,Teagasc.
  • Handle: RePEc:tea:wpaper:1101
    as

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    File URL: http://www.teagasc.ie/rural-economy/downloads/workingpapers/11wpre01.pdf
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    References listed on IDEAS

    as
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