Abstract
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.
Original language | English (US) |
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Pages (from-to) | 285-297 |
Number of pages | 13 |
Journal | Empirical Economics |
Volume | 34 |
Issue number | 2 |
DOIs | |
State | Published - Mar 2008 |
Externally published | Yes |
Keywords
- Debt-solvency
- Farmland values
- Government payments
- Panel cointegration
- Pooling
ASJC Scopus subject areas
- Statistics and Probability
- Mathematics (miscellaneous)
- Social Sciences (miscellaneous)
- Economics and Econometrics