Dynamic Model of Capital Structure for the Noncorporate Firm

Larry Karp and Robert A. Collins

No 197663, 1989 Occasional Paper Series No. 5 from International Association of Agricultural Economists

Abstract: A dynamic model of capital structure for the noncoiporate farm is developed and analyzed. In this model. the probability of bankruptcy increases as the farmer's debt/asset ratio increases. Funds invested outside agriculture earn a risldess rate of return. The farmer/proprietor is also able to obtain a riskless wage from off-fann employment; this wage may differ from the implicit wage received as a farmer. The expected return to equity on the farm depends on the leverage. The model examines the effects on optimal capital snucture of (I) bankruptcy risk. (2) the difference between the riskless rate and the expected renun in agriculture, and (3) the difference between the off.farm wage and the implicit on-farm wage. The third element introduces an incentive for the prq>rietor to change leverage over the proprietor's lifetime; this ocrurs if the difference between the wages is nonzero but CKeywords: Financial Economics; Public Economics (search for similar items in EconPapers)
Pages: 7
Date: 1989
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Related works:
Working Paper: A DYNAMIC MODEL OF CAPITAL STRUCTURE FOR THE NONCORPORATE FIRM (1988)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:iaaeo5:197663

DOI: 10.22004/ag.econ.197663

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