The role of investment, 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: Department of Agricultural Economics, Rural Economy Development Programme, Teagasc

No 1101, Working Papers from Rural Economy and Development Programme,Teagasc

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 in- vestment 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 nancing 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.

Pages: 43 pages
Date: 2011
New Economics Papers: this item is included in nep-agr
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