Debts, subsidies and performance of Russian agricultural enterprises

This study evaluates the impact of capital structure and subsidizing program on technical efficiency of agricultural production on Russian farms. The agency cost, free cash flow, and credit evaluation concepts of finance theory complemented with features of Russian farming provide alternative explanations for the potential relationship between financing arrangements and farm-level performance. A panel of large-scale dairy farms from the Moscow Region over the period 1996-2000 is the focus of the application. A two-stage procedure is employed. First, Data Envelopment Analysis is used to compute technical efficiency. Second, the performance measures are regressed on financial characteristics, such as debt to asset ratio, proxy for soft budget constraints, subsidies to revenue ratio and a set of socio-economic factors using a Tobit regression model. The analysis shows that debt to asset ratio does not fully depict the financial situation on Russian farms. No strong relation between capital structure and efficiency is found. However, a strong support of a negative role of soft budget constraint is observed. Loss-making farms that accumulate high debts and are nevertheless get external finance by means of credits, loans, supply of inputs and subsidies are less efficient. Higher wages is the key stimulating mechanism for increasing efficiency