Impact of debt structure on production efficiency and financial performance of Broadacre farms in Western Australia

Abstract

Farming activities are often financed using debt, yet empirical studies investigating the relationship between farm debt structure and performance are still rare. Using a 10 year unbalanced panel of Broadacre farms in Western Australia, we relate the impact of long-term debt, short-term debt and tax liability on farm performance measured by input-oriented technical efficiency and return on assets. We find farm technical efficiency is positively related to short-term debt, tax liability and capital investment, but negatively related to off-farm income generating activities. Long-term debt has no effect on production efficiency and return on assets. These results are robust to both parametric and nonparametric methods of estimation.