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Measuring credit capacity on Danish farms using DEA

Measuring credit capacity on Danish farms using DEA Purpose – The purpose of this paper is to introduce a novel measure of access to credit suited to estimate the relative change in credit reserves. Design/methodology/approach – A debt possibility frontier is estimated using data envelopment analysis and the Malmquist index is calculated. The Malmquist index is redubbed the Debt Development index and decomposed into “change in debt capacity” and “change in debt capacity utilization”. Bootstrapping is applied for statistical inference. The method is applied to an unbalanced panel of 92,000 Danish farm accounts from 1996 to 2009. Findings – The paper finds that credit capacity roughly doubled for Danish farmers over the period, and that utilization of credit capacity generally was proportional to capacity change, utilization being higher for dairy and pig farms, than for crop farms. Research limitations/implications – Changes in credit reserves may have important implications for risk management practice, investment and technology adoption and related policy issues. The method is limited by the possibility of strategic behavior of lenders during credit cycle busts. In credit cycle booms, the method gives a good basis for the estimates of change in credit reserves. Practical implications – In a period of increasing credit reserves, risk management institutions are unlikely to develop. Like agricultural policy, access to credit may crowd out market‐based risk management. Originality/value – The study represents a novel application and interpretation of a well‐known method. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

Measuring credit capacity on Danish farms using DEA

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References (49)

Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
0002-1466
DOI
10.1108/AFR-08-2012-0040
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to introduce a novel measure of access to credit suited to estimate the relative change in credit reserves. Design/methodology/approach – A debt possibility frontier is estimated using data envelopment analysis and the Malmquist index is calculated. The Malmquist index is redubbed the Debt Development index and decomposed into “change in debt capacity” and “change in debt capacity utilization”. Bootstrapping is applied for statistical inference. The method is applied to an unbalanced panel of 92,000 Danish farm accounts from 1996 to 2009. Findings – The paper finds that credit capacity roughly doubled for Danish farmers over the period, and that utilization of credit capacity generally was proportional to capacity change, utilization being higher for dairy and pig farms, than for crop farms. Research limitations/implications – Changes in credit reserves may have important implications for risk management practice, investment and technology adoption and related policy issues. The method is limited by the possibility of strategic behavior of lenders during credit cycle busts. In credit cycle booms, the method gives a good basis for the estimates of change in credit reserves. Practical implications – In a period of increasing credit reserves, risk management institutions are unlikely to develop. Like agricultural policy, access to credit may crowd out market‐based risk management. Originality/value – The study represents a novel application and interpretation of a well‐known method.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: Nov 1, 2013

Keywords: Risk management; DEA; Access to credit; Agricultural finance; Credit reserves; Malmquist index

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