Private Equity and Asset Characteristics: The Case of Agricultural Production

Unlike most other mature industries; the agricultural production sector is dominated by family firms, partnerships, and cooperatives; with few corporations and limited access to capital derived from a source other than retained earnings and existing owners. However, use of external equity capital in agriculture has increased dramatically since 1990. This funding source allows farms to exploit entrepreneurial opportunities not easily financed by debt. Following Williamson (1988), we view debt and equity as alternative governance structures, and argue that transaction cost economics offers insights on firms’ financial structure beyond those provided by agency theory. We relate capital structure to asset specificity, a particularly important attribute in agricultural production. We construct an international data set of agricultural companies receiving external private equity, and show that the attributes of the assets involved in production are important determinants of financial structure.