Estimation of a Backward-Bending Investment Demand Function for Agribusiness Firms

Jaclyn D. Kropp and Gabriel Power

No 61293, 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado from Agricultural and Applied Economics Association

Abstract: We investigate irreversible investment behavior under uncertainty of payoffs using U.S. firm-level panel data. We estimate the relationship between the firm’s investment to capital ratio and the interest rate, while controlling for investment opportunities, real option values, uncertainty and profitability. The results indicate the investment demand curve is a backward-bending function of the interest rate; at low interest rates, an increase in the interest rate leads to increased investment by increasing the cost of postponing investment. Firm investment behavior is also consistent with real options behavior. The investment behavior of agribusiness firms is significantly different from firms in other sectors.

Keywords: Agribusiness; Agricultural Finance; Financial Economics (search for similar items in EconPapers)
Pages: 23
Date: 2010-05
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea10:61293

DOI: 10.22004/ag.econ.61293

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