Dynamic Target Capital Structure and Speed of Adjustment in Farm Business

Aderajew Tamirat*, Andres Trujillo Barrera, Joost Pennings

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review


In corporate finance, the determinants of firm target capital structure have been widely studied. However, less attention has been paid to understanding the financing behavior of Small and Medium Enterprises (SMEs), particularly farm businesses as a distinctive setting. We use a dynamic partial adjustment model with a panel sample of 1500 Dutch farms over the years 2001 to 2015. We provide evidence that leverage is dynamic over time-varying farm characteristics, and the pecking-order and signalling theories explain this leverage dynamism in the farm business. This result is very robust across different farm types, size categories and data sample periods. Farm asset tangibility and growth opportunity significantly determine the target capital structure. In addition, we find that farm leverage is highly persistent (slow adjustment speed) and that lagged leverage is the best predictor of
subsequent leverage ratios. Farms exhibit slower adjustment during recessions, and the effect is most pronounced for larger farms. Decomposing the analysis into farm types, we find that horticulture farms rebalance to the target much faster after leverage shocks. This variation is mainly attributed to the difference in adjustment costs. The results give better insight for policy makers and financial institutions on the impacts of financial policies on farm viability,
and the farm capital decision-making process for risk and profit evaluation. It should also spark discussion about the applicability of corporate finance theories in farm business.
Original languageEnglish
Pages (from-to)637-661
Number of pages25
JournalEuropean Review of Agricultural Economics
Issue number4
Publication statusPublished - Sep 2019

JEL classifications

  • q14 - Agricultural Finance
  • q13 - "Agricultural Markets and Marketing; Cooperatives; Agribusiness"


  • farm business
  • System-GMM estimator
  • target capital structure
  • speed of adjustment

Cite this