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The role of fundamental Q and financing frictions in agricultural investment decisions: an analysis pre and post financial crisis

Conor O'Toole (), Carol Newman () and Thia Hennessy ()
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Thia Hennessy: Rural Economy Development Programme, Teagasc

Economic Papers from Trinity College Dublin, Economics Department

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 investment 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 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, we find no evidence that farmers use off-farm capital to fund on-farm investment.

Keywords: Credit Constraints; Firm Level Investment; Tobin's Q; Debt (search for similar items in EconPapers)
JEL-codes: G31 G32 F34 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2011-02
New Economics Papers: this item is included in nep-agr, nep-bec and nep-hme
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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduee:tep0311

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