Signaling Credit Risk in Agriculture: Implications for Capital Structure Analysis
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Signaling is an important element in the lender-borrower relationship that influences the
cost and availability of debt capital to agricultural borrowers. This paper analyzes the
effects of signaling on farm capital structure in conjunction with the pecking order and
trade-off theories. The aggregate estimation indicates that signaling does affect agricultural
credit relationships through measures of past cash flow and profitability. High-quality
borrowers achieve greater credit capacity by providing lenders with valid signals of their
financial status, while adjusting toward target debt levels over time and following the
pecking order relationship in the short run.