Business risk, financial risk and savings: does perceived higher business risk induce savings among small agricultural operations in the USA?

Abstract

PurposeThe purpose of this paper is to present theoretical synopsis of risk balancing hypothesis (RBH) and estimate empirical models examining debt, savings and debt-to-equity use decisions of small US farms.Design/methodology/approachThe authors use primary survey data from Tennessee and generalized linear models (GLMs).FindingsThe study’s findings suggest that the perceived higher business risk (BR) significantly increases the extent of debt use, savings use and debt-to-equity of small farmers. Moreover, results indicate that factors such as age and education of the operator, family involvement, incomes, land acreage, adoption of alternative on-farm enterprises and farmers' continuation plan significantly influence the financing decisions of small farm operations.Originality/valueThe authors investigated an essential empirical question examining the risk balancing behavior of small US farm operations. While risk balancing has been a theme of several studies, none of the previous studies have specifically looked at the behavior in the context of small US farms. The theoretical synopsis and empirical findings contribute to the literature of risk balancing, debt use and savings use decisions and the policy discussions on farm financial and support strategies.