The Role Of Fundamental Q And Financing Frictions In Agricultural Investment Decisions: An Analysis Pre And Post Financial Crisis

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. The authors' findings suggest that farmer's investment decisions are not driven by market fundamentals. They 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, they find no evidence that farmers use off-farm capital to fund on-farm investment.

Provided by: Trinity College Dublin Topic: CXO Date Added: Feb 2011 Format: PDF

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