The role of financing frictions in agricultural investment decisions: an analysis pre and post financial crisis
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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 on-farm capital to fund
on-farm investment.