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Signaling Credit Risk in Agriculture: Implications for Capital Structure Analysis

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  • Zhao, Jianmei
  • Barry, Peter J.
  • Katchova, Ani L.

Abstract

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.

Suggested Citation

  • 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, Cambridge University Press, vol. 40(3), pages 805-820, December.
    • Handle: RePEc:cup:jagaec:v:40:y:2008:i:03:p:805-820_00
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    Cited by:

    1. Khatami, Koohyar & Shadbolt, Nicola & Dooley, Anne & Gray, David, 2019. "Pr - New Zealand Dairy Farmers’ Debt Management Strategies," 22nd Congress, Tasmania, Australia, March 3-8, 2019 345895, International Farm Management Association.
    2. Kavčáková, Michaela & Kočišová, Kristína, 2020. "Using Data Envelopment Analysis in Credit Risk Evaluation of ICT Companies," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 10(3), December.
    3. Harris, James Michael & Blank, Steven C. & Erickson, Kenneth W. & Hallahan, Charles B., 2010. "Off-farm Income and Investments in Farm Assets: A Double Hurdle Approach," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61531, Agricultural and Applied Economics Association.
    4. Enjolras, G. & Sanfilippo, G., 2018. "The role of debt in financing French farm investments," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277006, International Association of Agricultural Economists.
    5. Harris, James Michael & Dillard, John & Erickson, Kenneth W. & Hallahan, Charles B., 2009. "Changes in Debt Patterns and Financial Structure of Farm Businesses: A Double Hurdle Approach," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49402, Agricultural and Applied Economics Association.
    6. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working papers 122846, Factor Markets, Centre for European Policy Studies.
    7. 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.
    8. Cheng, Yuxi & Katchova, Ani, 2018. "Cooperatives capital structure adjustment during the agricultural downturn," 2018 Annual Meeting, August 5-7, Washington, D.C. 273788, Agricultural and Applied Economics Association.
    9. Ying Chen & Eric Valenzuela & Don Capener, 2024. "How hotel firm value fluctuates with alternative leveraging strategies," American Journal of Economics and Sociology, Wiley Blackwell, vol. 83(1), pages 177-197, January.
    10. Peter Howley & Emma Dillon, 2012. "Factors affecting the level of farm indebtedness: the role of farming attitudes," Working Papers 1201, Rural Economy and Development Programme,Teagasc.
    11. 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.
    12. Amin W. Mugera & Gerald G. Nyambane, 2015. "Impact of debt structure on production efficiency and financial performance of Broadacre farms in Western Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 59(2), pages 208-224, April.
    13. 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.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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