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

Abstract

This paper uses a fundamental Q model of investment to consider the role played by nancing frictions in agricultural investment decisions, controlling econometrically for censoring, heterogeneity and errors-in-variables. Our ndings suggest that farmer's in- vestment decisions are not driven by market fundamentals. We nd 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- nancial crisis period when debt overhang becomes a signi cant impediment to farm investment. The evidence suggests that farmers increasingly rely on internal liquidity to drive investment. Finally, we nd no evidence that farmers use o -farm capital to fund on-farm investment.