Corn Study Links Financial Resources and Growth
Management Prof and Doctoral Student Examined Effects of Ethanol Mandates
Oct. 28, 2008
Analyzing the Midwest’s increased corn production after the 2005 federal biofuel mandates, two School of Management researchers have directly linked higher levels of bank deposits — and thus good access to outside financing — to general economic growth.
The study looks at the connection between the availability of outside financing to producers in a geographic area and producers’ reactions to changing product demand.
“The 2005 ethanol mandates caused corn prices to double,” notes study co-author Dr. Alexander Butler. “We wondered, ‘How would corn farmers be able to respond?’ ”
Dr. Butler and co-author Jess Cornaggia studied county-by-county data on crop yields, weather, demographics and availability of financing in 12 Midwestern states. They concluded that only farmers in areas with good access to bank financing were able to increase corn output per acre planted.
Both Dr. Butler, an assistant professor of finance and managerial economics, and Mr. Cornaggia, a Ph.D. student, are researchers in the school’s Finance and Managerial Economics area.
In June, their study, “Does Access to Finance Improve Productivity? Evidence from a Natural Experiment,” was chosen as one of the best papers presented at the prestigious Western Finance Association’s international meeting in Waikola, Hawaii. At that meeting, researchers from around the globe presented 144 different papers; only six were chosen to receive best paper awards.
The paper adds to a longstanding discussion about whether availability of outside financing causes economic growth in an area or whether growing areas are simply more conducive to financial development.
“Separating which causes which has been a decades-long debate in the economic development literature,” Dr. Butler says.
“The results of our study provide clear evidence that economic outcomes are at least partly a result of good financial development,” he says.
The project complements Mr. Cornaggia’s familiarity with agriculture gained from growing up in the center of eastern Washington’s wheat-growing region. He will use the study as part of his doctoral dissertation.
A second part of Mr. Cornaggia’s dissertation will deal with the relationship between the productivity of firms and the way they manage risk—in his case, the way farmers deal with crop insurance.
He collected anecdotal evidence on that topic last summer by interviewing farmers on a driving tour of the Midwest on his way back to Dallas after serving an internship with the Commodity Future Trading Commission in Washington, D.C. The main part of his analysis will be based on statistical data from the Risk Management Agency, a branch of the U.S. Department of Agriculture.
Mr. Cornaggia earned his Bachelor of Science degree in engineering and his MBA degree from Gonzaga University in Spokane, Wash. After he graduates from UT Dallas in 2009, he hopes to become a tenure-track professor of finance, like his research partner Dr. Butler, who is also the director of his dissertation.
And what made him choose UT Dallas for a doctorate in finance?
“One of my professors at Gonzaga told me the finance department at UT Dallas was recognized as ‘up-and-coming’ in the field. I haven’t been disappointed,” he says.