role of credit constraints and government subsidies in farmland valuations in the US: an options pricing model approach

The Modigliani-Miller (M-M) theorem of financial asset theory concludes that asset values are independent of financing. In other words, debt-solvency (credit constraints) does not affect asset values. Therefore, using the M-M theorem one can argue that credit constraints in the farm sector (where la...

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Bibliographic Details
Published in:Empirical economics 2008-01, Vol.34 (2), p.285-297
Main Authors: Mishra, A.K, Moss, C.B, Erickson, K.W
Format: Article
Language:English
Subjects:
Agricultural credit
Agricultural economics
agricultural land
Agricultural policy
Agricultural subsidies
Agriculture
Arbitrage
Asset acquisitions
Assets
Bankruptcy
Capital markets
Corporate debt
Credit
Credit rationing
debt
Default
econometric models
Econometrics
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Equity
farm credit
Farming
Farms
Finance
Financial theory
government payments
Government subsidies
Insurance
interest (finance)
Interest rates
Investors
Land
Land economics
Land use
land values
Liquidity
Management
Option pricing
Original Paper
Portfolio management
Securities prices
Solvency
Statistics for Business
Studies
U.S.A
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Summary:The Modigliani-Miller (M-M) theorem of financial asset theory concludes that asset values are independent of financing. In other words, debt-solvency (credit constraints) does not affect asset values. Therefore, using the M-M theorem one can argue that credit constraints in the farm sector (where land is the most important asset) do not affect the value of farmland. However, this proof relies on several arbitrage assumptions that are violated in the case of agricultural assets. This paper examines the effect of debt-solvency and government payments on changes in annual farmland values by state in the United States. Using panel cointergration method, results indicate that farmland values are significantly affected by both solvency and government payments. In addition, the results imply that government payments may affect agricultural asset values beyond the direct effect hypothesized in the literature.
ISSN:1435-8921
0377-7332
1435-8921
DOI:10.1007/s00181-007-0122-9