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

West, Steele Christian; Mugera, Amin; Kingwell, Ross

doi:10.1111/1467-8489.12415

Cited by 9 publications

(9 citation statements)

References 74 publications

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“…We find that a firm’s sustainability practice does influence the SOA. This complements prior research on the determinants of SOA (Jiang et al , 2021; Öztekin and Flannery, 2012; West et al , 2021).…”

Section: Introductionsupporting

confidence: 72%

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Adeneye

Kammoun²,

Wahab³

2022

SAMPJ

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Purpose This study aims to examine the impact of sustainable practices as proxied by the environmental, social and governance (ESG) score on capital structure. It also investigates whether ESG performance influences the speed of adjustment (SOA) to target leverage in firms. Design/methodology/approach The sample covers 116 non-financial firms listed on the main stock exchanges from five Southeast ASEAN countries (Bursa Malaysia, Indonesia Stock Exchange, Philippines Stock Exchange, Singapore Stock Exchange and Stock Exchange of Thailand) over the period 2012–2019. The study adopts the OLS regression and system-GMM estimators to perform the data analysis. Findings The authors show that the ESG score is positively associated with book leverage, suggesting that firms increase their debt capital through sustainable practices. However, they find that the ESG score is negatively associated with market leverage across our model estimations. The authors also reveal that environmental, social and governance pillar scores produce about 7.82%, 2.88% and 0.47% SOAs, respectively, higher than the SOA of the traditional SOA without the ESG factor. The aggregate ESG score has about 3.41% SOA higher than the baseline SOA without the ESG factor. Practical implications This study is of interest to investors, corporate firms and policymakers. The study demonstrates that the ESG score increases the firm’s SOA to target leverage. By disaggregating the ESG score, the authors establish that ESG pillar scores produce higher SOAs than the traditional SOA (without ESG), with the environmental score inducing the fastest SOA. Practically, the study implies that environmentally sustainable activities reduce environmental transaction costs, benefit firms through better information transparency and enhance a trustful climate between the firm and suppliers of capital. Therefore, this study demonstrates that firms do not only incur the cost of disseminating ESG information but also benefit from lower information asymmetry and a higher SOA with better tax-deductible advantages. Social implications The findings have combined advantages for both stakeholders and directors who monitor and manage the firms’ resources to improve the quality of ESG practices and initiatives. Originality/value To the best of the authors’ knowledge, this study is among the first to establish that sustainable practices induce higher debt capital. Secondly, unlike prior research focusing on the cost of capital, the authors examine whether ESG performance affects capital structure patterns. Thirdly, it documents the extent to which sustainable practices influence the SOA towards target leverage in firms. The authors contribute to corporate finance literature that firms reach faster to their target leverage in the presence of ESG performance. Theoretically, through the notion of the stakeholder proposition, the study establishes that the firms’ pursuance of stakeholder goals further enhances the prediction of the trade-off theory.

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Section: Introductionsupporting

confidence: 72%

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Adeneye

Kammoun²,

Wahab³

2022

SAMPJ

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“…Further the authors reveal that the "POT" explains the adjustment variations where the farm businesses prefer retained earnings over external borrowings in financing the new investments. The relevance of POT is also supported by the findings of West et al (2021) who recommended policymakers to introduce policies which would help the managers in reduction of the cashflow volatility and indebtedness along with the improvement of SoA. Flannery and Rangan (2006) test the relevance of "POT", which recommends the order of financing sources and "market timing theory" which deals with managers' cumulative efforts to time the market for securities' issuance.…”

Section: Capital Structure Adjustmentmentioning

confidence: 93%

What we know and what we should know about speed of capital structure adjustment: a retrospective using bibliometric and system thinking approach

Hegde

Venkateshwarlu

Panda

et al. 2022

QRFM

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Purpose This paper aims to conduct bibliometric analysis on the studies dealing with capital structure’s speed of adjustment (SoA) and identify the prominent themes while suggesting future research directions in the area. The existing reviews broadly focus on the capital structure, which provides the scope for conducting a review on this sub-aspect of capital structure. Design/methodology/approach This study uses a three-stage process to conduct this review: identification of academic journals, selection and analysis of target papers. This study uses a combination of bibliometric tools and a system thinking approach to assess the current status of publications and emerging themes within the literature. Findings This study has found a progressive evolution of SoA in capital structure research from 1984 to 2021. Studies largely focus on implementing the dynamic models to analyse the impact of adjustment costs, dynamic economic conditions, corporate governance practices and other variables on the firms’ adjustment speed and financial decisions. The network analysis of citations, keywords and clusters gives further knowledge on the intellectual structure of the data. Research limitations/implications This study is highly dependent on the papers available within the SCOPUS database. Studies not included herein are not part of this analysis, which may or may not bear an effect on the study’s findings. Originality/value To the best of the authors’ knowledge, the application of systems engineering concept of “system thinking approach” to identify literature gap and suggest directions for forthcoming research is the first of its kind, thus adding a novel and multidisciplinary aspect to this study.

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“…The hierarchy of funding sources is driven not only by differences in relevant interest rates associated with the time value of money but also differences in risk, transactions costs, and tax treatment for different sources of capital. There is some empirical support for this theory in the context of agricultural production (Aderajew et al, 2019; Barry et al, 2000; West et al, 2021). Pecking order theory is also consistent with the idea that farm businesses may forgo storing commodities to generate working capital and cash flow (Nefstead, 1981).…”

Section: Theorymentioning

confidence: 97%

Commodity storage and the cost of capital: Evidence from Illinois grain farms

Janzen,

Paulson,

Tsay

2023

American J Agri Economics

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Commodity inventories are the key state variable determining the magnitude of commodity price responses to supply and demand shocks. Many firms in commodity supply chains use storage, but we know little about which firms and why. The economic theory of storage asserts that firms in a competitive market for inventories will store based on current and expected market prices and the per‐unit cost of storing. We empirically test at the firm‐level the importance of one major cost of storage: the opportunity cost of capital used to value foregone revenue from deferred commodity sales. To do so, we use panel data from thousands of Illinois farms who hold inventories of corn and soybeans. Although interest rates as a measure of capital costs are unlikely to vary widely across firms in this context, we exploit variation in the weighted average cost of capital due to cross‐firm differences in capital structure. Using two‐way fixed effects regressions, we find a statistically significant average effect of capital costs on inventory that masks notable heterogeneity across firms. Panel quantile regressions reveal two groups of firms: one whose inventory holdings are responsive to changes in the opportunity cost of storage and another whose are not. Our results suggest some farms behave like the profit‐maximizing ones from theory but substantial inframarginal commodity inventories are held by farms for other reasons.

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

Cited by 9 publications

References 74 publications

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

Capital structure and speed of adjustment: the impact of environmental, social and governance (ESG) performance

What we know and what we should know about speed of capital structure adjustment: a retrospective using bibliometric and system thinking approach

Commodity storage and the cost of capital: Evidence from Illinois grain farms

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