Abstract
The recent farm crisis has increased awareness of nonfarm businesses’ contribution to future economic development in rural areas. Rural area residents increasingly depend on employment off the farm. A crucial determinant of rural nonfarm businesses growth is the adequacy of local capital markets. This study recognizes it is impossible to precisely measure capital market adequacy for rural nonfarm businesses. Instead the work measures the relative difficulty in acquiring capital for firms of varying types after attempting to account for major risk indicators. In this study, a capital market is considered inadequate if businesses have difficulty obtaining funds because of non-risk reasons.
Highlights
The recent farm crisis has increased awareness of nonfarm businesses' contribution to future economic development in rural areas
The second view holds thatbusiness ideas existbutcapital markets are inadequate and this lack of funds restricts rural economic development This paper presents an empirical test of the second view
The data are unable to distinguish the dominant cause. This multivariate analysis of 815 nonfarm businesses in 15 local capital markets in four rural Wisconsin counties suggests that rural capital markets are functioning adequately for most segments of the local nonfarm business sector
Summary
The recent farm crisis has increased awareness of nonfarm businesses' contribution to future economic development in rural areas. The second view holds thatbusiness ideas existbutcapital markets are inadequate and this lack of funds restricts rural economic development This paper presents an empirical test of the second view. Statistical rejection of the null hypothesis implies that capital gaps exist and that inadequate fmancing restrains rural nonfarm businesses. Financial markets perform adequately when all users have the same access to financial capital after adjusting for frrm specific risk. The financial market is inadequate ifbusinesses have difficulty obtaining funds because of reasons that reflect excessive information or transaction costs, or institutional limitations This study recognizes it is impossible to precisely measure capital market adequacy for rural nonfarm businesses. A capital market is considered inadequate ifbusinesses have difficulty obtaining funds because of non-risk reasons
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