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

This paper uses a fundamental Q model of investment to consider the role playedby financing frictions in agricultural investment decisions, controlling econometrically forcensoring, heterogeneity and errors-in-variables. Our findings suggest that farmer's investment decisions are not driven by market fundamentals. We find some evidence thatdebt overhang restricts investment but investment is not dependent on liquidity or internalfunds. The role of financing frictions in determining investment decisions changes in thepost-financial crisis period when debt overhang becomes a significant impediment to farminvestment. The evidence suggests that farmers increasingly rely on internal liquidity todrive investment. Finally, we find no evidence that farmers use on-farm capital to fundon-farm investment.