IDEAS home Printed from https://ideas.repec.org/a/bla/ajarec/v65y2021i2p391-412.html
   My bibliography  Save this article

Drivers of farm business capital structure and its speed of adjustment: evidence from Western Australia’s Wheatbelt

Author

Listed:
  • Steele C. West
  • Amin W. Mugera
  • Ross S. Kingwell

Abstract

The viability and profitability of a farm business can be influenced by how it chooses to fund its operations and capital investments either using debt or internal funds. This study examines the determinants and speed of adjustment of the capital structure of broadacre farm businesses in Western Australia’s Wheatbelt. Results show that prior period cash flow and equity, farm size and farm location are significant determinants of observed capital structures. Farm businesses are found to quickly adjust their capital structure to desired target levels, suggesting that adjustment costs are not high. The findings support the view that there is a pecking order in the choice of how farm businesses fund working capital and capital investments.

Suggested Citation

  • Steele C. West & Amin W. Mugera & Ross S. Kingwell, 2021. "Drivers of farm business capital structure and its speed of adjustment: evidence from Western Australia’s Wheatbelt," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 65(2), pages 391-412, April.
    • Handle: RePEc:bla:ajarec:v:65:y:2021:i:2:p:391-412
    DOI: 10.1111/1467-8489.12415
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1467-8489.12415
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1467-8489.12415?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Xin Chang & Sudipto Dasgupta, 2009. "Target Behavior and Financing: How Conclusive Is the Evidence?," Journal of Finance, American Finance Association, vol. 64(4), pages 1767-1796, August.
    2. Wilm Fecke & Jan-Henning Feil & Oliver Musshoff, 2016. "Determinants of loan demand in agriculture: empirical evidence from Germany," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 76(4), pages 462-476, November.
    3. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2003. "Instrumental variables and GMM: Estimation and testing," Stata Journal, StataCorp LP, vol. 3(1), pages 1-31, March.
    4. Jeffrey M. Wooldridge, 2001. "Applications of Generalized Method of Moments Estimation," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 87-100, Fall.
    5. Escalante, Cesar L. & Barry, Peter J., 2003. "Determinants of the Strength of Strategic Adjustments in Farm Capital Structure," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 35(1), pages 1-12, April.
    6. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    7. Julien Cadot, 2013. "Collateral, bank monitoring and firm performance: the case of newly established wine-farmers," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(3), pages 344-358, July.
    8. Cook, Douglas O. & Tang, Tian, 2010. "Macroeconomic conditions and capital structure adjustment speed," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 73-87, February.
    9. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    10. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    11. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    12. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    13. Botterill, Linda Courtenay & Chapman, Bruce & Kelly, Simon, 2017. "Revisiting revenue contingent loans for drought relief: government as risk manager," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 61(3), July.
    14. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    15. repec:bla:jfinan:v:43:y:1988:i:1:p:1-19 is not listed on IDEAS
    16. Fuglie, Keith & Clancy, Matthew & Heisey, Paul & Macdonald, James, 2017. "Research, Productivity, And Output Growth In U.S. Agriculture," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 49(4), pages 514-554, November.
    17. Catherine Benjamin & Euan Phimister, 2002. "Does Capital Market Structure Affect Farm Investment? A Comparison using French and British Farm-Level Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 1115-1129.
    18. Ivo Welch, 2004. "Capital Structure and Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 106-131, February.
    19. Ani L. Katchova, 2005. "Factors affecting farm credit use," Agricultural Finance Review, Emerald Group Publishing, vol. 65(2), pages 17-29, July.
    20. Hackbarth, Dirk & Miao, Jianjun & Morellec, Erwan, 2006. "Capital structure, credit risk, and macroeconomic conditions," Journal of Financial Economics, Elsevier, vol. 82(3), pages 519-550, December.
    21. Wolfgang Drobetz & Dirk C. Schilling & Henning Schröder, 2015. "Heterogeneity in the Speed of Capital Structure Adjustment across Countries and over the Business Cycle," European Financial Management, European Financial Management Association, vol. 21(5), pages 936-973, November.
    22. Maria Bampasidou & Ashok K. Mishra & Charles B. Moss, 2017. "Modeling debt choice in agriculture: the effect of endogenous asset values," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 77(1), pages 95-110, May.
    23. Harris, Milton & Raviv, Artur, 1991. "The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    24. Sarah Anne Stutzman, 2017. "Differences across farm typologies in capital investment during 1996-2013," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 78(1), pages 41-64, November.
    25. Peter J. Barry & Ralph W. Bierlen & Narda L. Sotomayor, 2000. "Financial Structure of Farm Businesses under Imperfect Capital Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 920-933.
    26. Levine, Carolyn B. & Hughes, John S., 2005. "Management compensation and earnings-based covenants as signaling devices in credit markets," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 832-850, October.
    27. Matthew Serfling, 2016. "Firing Costs and Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 71(5), pages 2239-2286, October.
    28. Zhao, Jianmei & Barry, Peter J. & Katchova, Ani L., 2008. "Signaling Credit Risk in Agriculture: Implications for Capital Structure Analysis," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 40(3), pages 1-16, December.
    29. Viswanath, P. V., 1993. "Strategic Considerations, the Pecking Order Hypothesis, and Market Reactions to Equity Financing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(2), pages 213-234, June.
    30. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    31. Federico José Trindade & Lilyan Estela Fulginiti, 2015. "Is there a slowdown in agricultural productivity growth in South America?," Agricultural Economics, International Association of Agricultural Economists, vol. 46(S1), pages 69-81, November.
    32. Daniel L. Prager & Christopher B. Burns & Noah J. Miller, 2018. "How do financially vulnerable farms finance debt in periods of falling prices?," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 78(4), pages 412-424, March.
    33. Tesfaye T. Lemma & Minga Negash, 2014. "Determinants of the adjustment speed of capital structure: Evidence from developing economies," Journal of Applied Accounting Research, Emerald Group Publishing, vol. 15(1), pages 64-99.
    34. Devos, Erik & Rahman, Shofiqur & Tsang, Desmond, 2017. "Debt covenants and the speed of capital structure adjustment," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 1-18.
    35. Robert Dinterman & Ani L. Katchova & James Michael Harris, 2018. "Financial stress and farm bankruptcies in US agriculture," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 78(4), pages 441-456, February.
    36. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    37. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    38. Tesfaye T. Lemma & Minga Negash, 2014. "Determinants of the adjustment speed of capital structure," Journal of Applied Accounting Research, Emerald Group Publishing Limited, vol. 15(1), pages 64-99, May.
    39. Uschi Backes-Gellner & Arndt Werner, 2007. "Entrepreneurial Signaling via Education: A Success Factor in Innovative Start-Ups," Small Business Economics, Springer, vol. 29(1), pages 173-190, June.
    40. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    41. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    42. Kingwell, Ross S. & Farré, Imma, 2009. "Climate change impacts on investment in crop sowing machinery," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 53(2), pages 1-20.
    43. Khan, Farid & Salim, Ruhul & Bloch, Harry & Islam, Nazrul, 2017. "The public R&D and productivity growth in Australia’s broadacre agriculture: is there a link?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 61(2), April.
    44. Fan, Joseph P. H. & Titman, Sheridan & Twite, Garry, 2012. "An International Comparison of Capital Structure and Debt Maturity Choices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 23-56, February.
    45. Peter Howley & Emma Dillon, 2012. "Modelling the effect of farming attitudes on farm credit use: a case study from Ireland," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 72(3), pages 456-470, November.
    46. Jianmei Zhao & Peter J. Barry & Gary D. Schnitkey, 2008. "Financing strategies under combined capital structure theories: a farm‐level simulation analysis," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 68(2), pages 321-338, November.
    47. -, 2009. "The economics of climate change," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 38679, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    48. Ross Kingwell & Imma Farré, 2009. "Climate change impacts on investment in crop sowing machinery ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 53(2), pages 265-284, April.
    49. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    50. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    51. Cadot, Julien, 2013. "Collateral, bank monitoring and firm performance: the case of newly established wine farmers," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(3).
    52. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    53. Stephen R. Bond, 2002. "Dynamic panel data models: a guide to micro data methods and practice," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 1(2), pages 141-162, August.
    54. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, vol. 68(1), pages 75-109, April.
    55. Stephen Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    56. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
    57. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    58. Glenn W. Boyle & Graeme A. Guthrie, 2003. "Investment, Uncertainty, and Liquidity," Journal of Finance, American Finance Association, vol. 58(5), pages 2143-2166, October.
    59. Biswajit Ghose & Kailash Chandra Kabra, 2020. "Does Growth Affect Firms’ Leverage Adjustment Speed? A Study of Indian Firms," Business Perspectives and Research, , vol. 8(2), pages 139-155, July.
    60. Brewer, Brady E. & Bergtold, Jason S. & Featherstone, Allen M. & Wilson, Christine A., 2019. "Farmers’ Choice of Credit among the Farm Credit System, Commercial Banks, and Nontraditional Lenders," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 44(2), May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Guthrie, Graeme, 2024. "Farm debt and the over-exploitation of natural capital," Resource and Energy Economics, Elsevier, vol. 77(C).
    2. Joseph P. Janzen & Nicholas D. Paulson & Juo‐Han Tsay, 2024. "Commodity storage and the cost of capital: Evidence from Illinois grain farms," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(2), pages 526-546, March.
    3. Janzen, Joseph & Paulson, Nick & Tsay, Juo-Han, 2022. "Grain storage and the cost of capital: Evidence from farm-level data," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322456, Agricultural and Applied Economics Association.
    4. Steele C. West & Amin W. Mugera & Ross S. Kingwell, 2024. "The impact of repayment obligations arising as a by‐product of input use on partial inefficiency: Evidence from Western Australian farm businesses," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 68(3), pages 678-700, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Im, Hyun Joong & Kang, Ya & Shon, Janghoon, 2020. "How does uncertainty influence target capital structure?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    2. Drobetz, Wolfgang & Gounopoulos, Dimitrios & Merikas, Andreas & Schröder, Henning, 2013. "Capital structure decisions of globally-listed shipping companies," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 52(C), pages 49-76.
    3. Giorgio Canarella & Stephen M. Miller, 2019. "Determinants of Optimal Capital Structure and Speed of Adjustment: Evidence from the U.S. ICT Sector," Working papers 2019-06, University of Connecticut, Department of Economics.
    4. İbrahim Yarba & Z. Nuray Güner, 2020. "Leverage dynamics: Do financial development and government leverage matter? Evidence from a major developing economy," Empirical Economics, Springer, vol. 59(5), pages 2473-2507, November.
    5. Zhang, Dongyang & Liu, Deqiang, 2017. "Determinants of the capital structure of Chinese non-listed enterprises: Is TFP efficient?," Economic Systems, Elsevier, vol. 41(2), pages 179-202.
    6. Mohamed, Hisham Hanifa & Masih, Mansur & Bacha, Obiyathulla I., 2015. "Why do issuers issue Sukuk or conventional bond? Evidence from Malaysian listed firms using partial adjustment models," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 233-252.
    7. San Martín, Pablo & Saona, Paolo, 2017. "Capital structure in the Chilean corporate sector: Revisiting the stylized facts," Research in International Business and Finance, Elsevier, vol. 40(C), pages 163-174.
    8. Elsas, Ralf & Florysiak, David, 2008. "Empirical Capital Structure Research: New Ideas, Recent Evidence, and Methodological Issues," Discussion Papers in Business Administration 4743, University of Munich, Munich School of Management.
    9. Aflatooni, Abbas & Ghaderi, Kaveh & Mansouri, Kefsan, 2022. "Sanctions against Iran, political connections and speed of adjustment," Emerging Markets Review, Elsevier, vol. 51(PB).
    10. Martinsson, Gustav, 2009. "Finance and R&D Investments - is there a debt overhang effect on R&D investments?," Working Paper Series in Economics and Institutions of Innovation 174, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    11. Elena Alexandra Nenu & Georgeta Vintilă & Ştefan Cristian Gherghina, 2018. "The Impact of Capital Structure on Risk and Firm Performance: Empirical Evidence for the Bucharest Stock Exchange Listed Companies," IJFS, MDPI, vol. 6(2), pages 1-29, April.
    12. Surenderrao Komera & P. J. Jijo Lukose, 2016. "Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(03), pages 1-26, September.
    13. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    14. Rana El Bahsh & Ali Alattar & Aziz N. Yusuf, 2018. "Firm, Industry and Country Level Determinants of Capital Structure: Evidence from Jordan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(2), pages 175-190.
    15. Alnori, Faisal & Alqahtani, Faisal, 2019. "Capital structure and speed of adjustment in non-financial firms: Does sharia compliance matter? Evidence from Saudi Arabia," Emerging Markets Review, Elsevier, vol. 39(C), pages 50-67.
    16. Biswajit Ghose & Kailash Chandra Kabra, 2018. "Dynamic Capital Structure Adjustments and Business Group Affiliations: Indian Evidence," Business Perspectives and Research, , vol. 6(1), pages 27-41, January.
    17. Micah Odhiambo Nyamita & Nirmala Dorasamy, 2014. "Factors Influencing Debt Financing within State-owned Corporations in Kenya," Journal of Economics and Behavioral Studies, AMH International, vol. 6(11), pages 884-905.
    18. Viet Anh Dang, 2011. "Testing Capital Structure Theories Using Error Correction Models: Evidence From The Uk, France And Germany," Post-Print hal-00732527, HAL.
    19. Emmanuel Kukah Damina & Taiwo Muritala & Abbas Umar Ibrahim, 2022. "Effect of Speed of Adjustments on Capital Structure Decision: A Conceptual Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 12(6), pages 15-21, November.
    20. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2012. "Asymmetric capital structure adjustments: New evidence from dynamic panel threshold models," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 465-482.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ajarec:v:65:y:2021:i:2:p:391-412. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/aaresea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.