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Dynamic Model of Capital Structure for the Noncorporate Firm

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  • Karp, Larry S.
  • Collins, Robert A.

Abstract

A dynamic model of capital structure for the noncoiporate farm is developed and analyzed. In this model. the probability of bankruptcy increases as the farmer's debt/asset ratio increases. Funds invested outside agriculture earn a risldess rate of return. The farmer/proprietor is also able to obtain a riskless wage from off-fann employment; this wage may differ from the implicit wage received as a farmer. The expected return to equity on the farm depends on the leverage. The model examines the effects on optimal capital snucture of (I) bankruptcy risk. (2) the difference between the riskless rate and the expected renun in agriculture, and (3) the difference between the off.farm wage and the implicit on-farm wage. The third element introduces an incentive for the prq>rietor to change leverage over the proprietor's lifetime; this ocrurs if the difference between the wages is nonzero but C

Suggested Citation

  • Karp, Larry S. & Collins, Robert A., 1989. "Dynamic Model of Capital Structure for the Noncorporate Firm," 1989 Occasional Paper Series No. 5 197663, International Association of Agricultural Economists.
    • Handle: RePEc:ags:iaaeo5:197663
    DOI: 10.22004/ag.econ.197663
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    References listed on IDEAS

    as
    1. Hellwig, Martin F, 1981. "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 71(1), pages 155-170, March.
    2. Innes, Robert, 1987. "Agency Costs, Farm Debt And Foreclosure: Positive And Policy Issues," Working Papers 225811, University of California, Davis, Department of Agricultural and Resource Economics.
    3. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    5. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    6. C. S. Thraen & J. W. Hammond & B. M. Buxton, 1978. "Estimating Components of Demand Elasticities from Cross-Sectional Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 60(4), pages 674-677.
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