The impact of financial leverage on farm technical efficiency during periods of price instability

Abstract

Purpose The purpose of this paper is to provide empirical evidence on the relationship between capital structure and technical efficiency (TE) for Italian cereal farms during the 2008–2014 period. Emphasis is given in the understanding of the relationship between the level of financial leverage for cereal farms and their production performance. Design/methodology/approach The methods employed in this research article are based on non-parametric techniques in order to derive TE estimates for a sample of Italian cereal farms based on available Farm Accountancy Data Network data to explore in depth the relationship amongst the financial exposure of the sector and the capacity to utilise an efficient and effective production technology. Furthermore, subsidies are considered in the model as a non-discretionary variable and therefore, as an input that farmers cannot directly influence within the production function. Hence, the non-discretionary Data Envelopment Analysis model is a more appropriate framework since it is not penalising farms at a lower level of Pillar I payments when benchmarked with farms that receive a higher level of payments. Findings The results show that significant improvements could be achieved for most of the farms in the sample by improving production and management practices. Furthermore, results provide an empirical support of the adjustment theory by showing a negative impact of debt to asset ratio to TE. Originality/value This research article provides a first insight on the evolution of the Italian cereal farms debt-TE relationship in periods where high price instability has been observed.

Econometric modelling of heterogeneity and structural changes in Dutch horticulture

“…While a stream of literature (the so-called cash flow theories) finds evidence for a positive relation between debt and the efficiency of a firm (e.g. Mugera and Nyambane, 2015), other studies -in line with the agency cost theoryfocus on the additional costs of debt and hence point at the potential negative relation between debt and firm efficiency (Gadanakis et al, 2019;Latruffe et al, 2017). In the context of Dutch horticulture, it however should be noted that a considerable number of firms are very capital intensive and highly dependent on external capital (Statistics Netherlands, 2020b), implying large differences in the debt position between firms.…”

“…Consequently, this enables to examine the impact of differences in capital structures and debt position on firm efficiency (see e.g. Davidova and Latruffe, 2007;Gadanakis et al, 2019). Further elaborating on the previous research objective, examining the relation between debt and efficiency is particularly relevant in the context of capital intensive sectors such as Dutch horticulture given the high financial risks involved.…”

“…Moreover, the resulting capital structure is also expected to affect firm-specific outcomes, in terms of firm efficiency and actual performance (RO5), as these are known to be affected by differences in capital structures (e.g. Gadanakis et al, 2019).…”

“…Davidova and Latruffe, 2007;Giannakas et al, 2001;Mugera and Nyambane, 2015). In the context of agriculture, therefore, farmers are often seen as the agents who are forced by the lenders (principles) to repay their debts (Gadanakis et al, 2019). Giannakas et al (2001) find support for this theory in a sample of Canadian wheat farms, as they find that farms with a greater reliance on debt operate their business more efficiently.…”

“…Various studies (e.g. Davidova and Latruffe, 2007;Latruffe et al, 2017;Mugera and Nyambane, 2015) examined the implications of differences in capital structure for actual farm performance, however with mixed evidence so far (Gadanakis et al, 2019). While several empirical studies point out that debt might increase efficiency, e.g.…”