Succession and investment in New Zealand farming

Abstract

ABSTRACT Farms in New Zealand are traditionally run as family businesses in which land and capital are handed down from one generation to the next. Such family businesses have time horizons that are measured in generations rather than years, and the identification of a successor encourages long-term planning that farms without successors cannot justify. Simultaneously, farms that invest in productive capital have higher future earnings potential, ceteris paribus, and therefore be more attractive to potential successors. Both of these relationships imply a correlation between succession planning and investment. In this paper we separate the causal effect succession planning has on investment using two-stage ordered probit regression with instrumental variables, namely, the extent farmers report they farm due to family tradition and the number of generations that the family has farmed in New Zealand. Our results show that the presence of a successor does in fact raise investment.