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Signaling Credit Risk in Agriculture: Implications for Capital Structure Analysis

Published online by Cambridge University Press:  26 January 2015

Jianmei Zhao ,
Peter J. Barry  and
Ani L. Katchova
Jianmei Zhao
Affiliation:
China Academy of Public Finance and Public Policy, the Central University of Finance and Economics
Peter J. Barry
Affiliation:
Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign
Ani L. Katchova
Affiliation:
Department of Agricultural Economics, University of Kentucky
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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.

Keywords

farm businessespecking order theorysignaling theorytrade-off theoryG11G32Q14
Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 40 , Issue 3 , December 2008 , pp. 805 - 820
Copyright
Copyright © Southern Agricultural Economics Association 2008

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