Repayment Capacity of Farmers: A Balanced Panel Data Approach

Abstract:     
Using a balanced panel of 184 unique Illinois farmers from 2000 to 2006, this study identifies the most pertinent factors that explain farmer repayment capacity. After correcting for endogeneity bias caused by farmer-specific effects by running a fixed effects regression model, we find that the one year lagged working capital ratio, the debt-to-asset ratio, and operator’s age are significant variables in explaining the coverage ratio, at the 10 percent, 5 percent, and 1 percent significance levels, respectively. This finding is important because it can enhance agricultural lenders’ ability to assess creditworthiness, screen borrowers, manage loan loss reserves, and price loans, thereby decreasing lenders’ costs associated with defaulted loans and ultimately reducing the costs borne by the government and taxpayers.

Number of Pages in PDF File: 16

Keywords: endogeneity, panel data, farm businesses, repayment capacity

JEL Classification: Q14, Q12

Accepted Paper Series