Corporate finance

My current research takes the insights offered by modern corporate finance theory and applies them to problems outside the usual domain of large corporations.

Current activity

Changing land use: Overcoming debt overhang with a modified form of debt

Growing environmental concerns mean that many farmers will need to change the way they use their land if they are to remain financially viable. However, the debt overhang problem can create situations when profitable land-use changes are not actually in farmers' own best interests. This paper proposes a new form of farm debt that is designed to facilitate profitable changes in land use by highly indebted farms. The proposed form of debt features an early repayment provision that alleviates the debt overhang problem by allowing farmers to retain a greater share of the benefits of land-use changes. 

This research is funded by the Endeavour Fund via the Manaaki Whenua--Landcare Research project “Moving the middle: Empowering land managers to act in complex rural landscapes.” 


Bank-shareholder welfare and sustainable farm lending

This paper discusses banks' potential to increase their shareholders' welfare by attaching more importance to the environmental performance of farm borrowers. Sustainable farm lending can give banks' shareholders direct ESG (environmental, social and governance) benefits that offset any reduction in bank profitability, but there is limited scope to do this as better ESG scores are likely to be associated with small reductions in banks' cost of equity capital. There are several ways in which shareholders can benefit indirectly from sustainable farm-lending practices. Firstly, banks can act as delegated monitors of farms' environmental performance on behalf of farms' customers. Secondly, banks can use sustainable lending to infer borrowers' private information about their default risk. Thirdly, facilitating changes in farming practices can increase farm values. Fourthly, farmers may be able to reduce short-termism by using sustainability-linked loans as commitment devices. All four possibilities potentially increase the value of banks' farm-debt portfolios. Finally, sustainable lending programmes that increase a bank's ESG score might increase the price it receives when it sells bonds to institutional investors, but the evidence reviewed here suggests that any cost savings will be small. The first four opportunities described here are more likely candidates for benefiting banks' shareholders. 

This research is funded by the Endeavour Fund via the Manaaki Whenua--Landcare Research project “Moving the middle: Empowering land managers to act in complex rural landscapes.” 


Barriers to farm investment

Highly indebted farms will struggle to finance the investment needed to achieve sustainable farming operations due to the well known debt overhang problem. Most of the existing theory of the dynamic debt overhang problem assumes that key economic variables evolve according to geometric Brownian motion. However, firms operating in commodity markets face mean-reverting output prices, which can fundamentally alter theoretical predictions regarding strategic default policies, investment, and debt overhang. This project investigates the economic significance of underinvestment caused by the debt overhang problem in a world of mean-reverting output prices. It also proposes policies for increasing farmers’ ability and willingness to undertake investments in sustainability.

This research is funded by the Endeavour Fund via the Manaaki Whenua--Landcare Research project “Moving the middle: Empowering land managers to act in complex rural landscapes.” 

Recent activity

Farm debt and the over-exploitation of natural capital

This paper uses a real-options model of a farming operation to show how standard loan contracts create incentives for farmers to focus on short-term financial performance at the expense of the farm's long-term natural capital. These incentives are a manifestation of the debt overhang problem. Extending this model shows how sustainability-linked loans can be used to weaken these incentives in a way that potentially benefits farmers and their bankers. The magnitude of the economic benefits generated by these loans depends on farm characteristics. The paper uses this model to investigate the optimal design of sustainability-linked loans. 

This research is funded by the Endeavour Fund via the Manaaki Whenua--Landcare Research project “Moving the middle: Empowering land managers to act in complex rural landscapes.” 


Discounting, disagreement, and the option to delay

Evaluating the benefits of investment projects related to climate change is complicated by the disagreements surrounding the discount rate. It is widely believed that disagreement about the discount rate requires relaxing the threshold needed to justify investment and that a larger adjustment is appropriate for projects with longer lives. I show that incorporating investment-timing flexibility reduces—and in some situations reverses—the adjustment needed to allow for discount-rate heterogeneity. In particular, when discount rates are low, heterogeneity is high, and the project’s lifetime is short, increases in discount-rate heterogeneity can lead to tougher (not easier) optimal investment tests.