The impact of liquidity and solvency on cost efficiency

Abstract

Purpose

This paper aims to develop and utilize a conceptual framework to examine the impact of liquidity and solvency on cost efficiency for a sample of Kansas farms.

Design/methodology/approach

A standard cost-efficiency model is modified to incorporate liquidity and solvency ratios. Tobit regressions are used to determine the impact of farm characteristics on improvements in efficiency.

Findings

Results confirm that liquidity and solvency measures have a significant impact on improving cost efficiency. Farms with larger expenditures on purchased inputs relative to capital were less likely to improve efficiency when liquidity and solvency were considered.

Originality/value

To the authors' knowledge, the paper is the first to add liquidity and solvency ratios to the cost-efficiency model developed by Färe et al. for the analysis of farms.

Citation

Alan Russell, L., R. Langemeier, M. and C. Briggeman, B. (2013), "The impact of liquidity and solvency on cost efficiency", Agricultural Finance Review, Vol. 73 No. 3, pp. 413-425. https://doi.org/10.1108/AFR-09-2012-0047