Evaluating the role of financial flexibility in farmers' investment decisions using latent class analysis

The global structural change in the agricultural sector entails adaptation processes, which often involve leveraged investments resulting in decreasing equity ratios of farms. Lower equity ratios can be followed by a reduction in the financial flexibility of farms. If additional investments with debt capital are made, the financial flexibility may be further restricted. The question that arises is if farm managers already consider the financial flexibility when making investment decisions. In the present study, farmers are faced with hypothetical investment alternatives in a discrete choice experiment. The investment alternatives differ in their profitability, the risk involved and in their impact on the farm's financial flexibility. The estimation of a latent class model, with four classes, reveals that in all classes the amount of debt capital necessary for the investment is relevant for the farmers' decision. In three of the four classes, the farmers' utility of an investment alternative decreases cetris paribus if the amount of debt capital increases.

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JEL Codes:
C35; G11; Q14

 Record created 2017-04-01, last modified 2020-10-28

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