Farm capital structure choice: theory and an empirical test

Feng Wu, Zhengfei Guan and Robert Myers

Agricultural Finance Review, 2014, vol. 74, issue 1, 115-132

Abstract: Purpose - – The purpose of this paper is to provide a unified theoretical framework that explains farm capital structure choice. Design/methodology/approach - – The framework accommodates different credit access scenarios and heterogeneous risk profiles of borrowers. It recognizes that the costs of capital are endogenously determined, reflecting the degree of credit risk and accessibility to credit markets. Based on the proposed model and the comparative statics derived thereof, the paper empirically tests the impacts of different factors on capital structure choice. Findings - – Based on the theoretical framework, the paper derived the impacts of different factors on capital structure choice using comparative statics. Results suggest that the potential determinants of capital structure have varying effects at different ranges of leverage. Empirical evidence supports the theoretical model. Originality/value - – Despite all of previous work on various aspects of farm capital structure choice, a framework that encompasses each of the different assumptions and scenarios is still lacking. The theoretical model integrates credit risk models and accommodates endogenous cost of capital, providing a comprehensive framework for studying farm capital structure choice and its determinants. The results provide insights that could help policy makers and lenders develop effective instruments to manage, monitor, and influence the financial leverage of farms at different quantiles of debt ratio.

Keywords: Capital structure; Credit risk; Cost of external capital; Credit access; Quantile regression (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:afrpps:v:74:y:2014:i:1:p:115-132

DOI: 10.1108/AFR-08-2012-0041

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