An Examination of Corporate Agribusiness Financial Performance-

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University of Kentucky UKnowledge

eses and Dissertations--Agricultural Economics Agricultural Economics

2012

AN EXAMINATION OF CORPO TE AGRIBUSINESS FINANCIAL

PERFORMANCE: HOW AGRIBUSINESSESPERFORM OVER TIME AND UNDER VARIOUS CONDITIONSSierra J. Enlow University of Kentucky , [email protected]

is Master's esis is brought to you for free and open access by the Agricultural Economics at UKnowledge. It has been accepted for inclusion ineses and Dissertations--Agricultural Economics by an authorized administrator of UKnowledge. For more information, please contact

[email protected].

Recommended CitationEnlow, Sierra J., "AN EXAMINATION OF CORPO TE AGRIBUSINESS FINANCIAL PERFORMANCE: HOW AGRIBUSINESSES PERFORM OVER TIME AND UNDER VARIOUS CONDITIONS" (2012).Teses and Dissertations-- Agricultural Economics.Paper 9.h p://uknowledge.uky.edu/agecon_etds/9
http://uknowledge.uky.edu/http://uknowledge.uky.edu/agecon_etdshttp://uknowledge.uky.edu/ageconmailto:[email protected]:[email protected]://uknowledge.uky.edu/ageconhttp://uknowledge.uky.edu/agecon_etdshttp://uknowledge.uky.edu/http://uknowledge.uky.edu/http://uknowledge.uky.edu/


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STUDENT AGREEMENT:

I represent that my thesis or dissertation and abstract are my original work. Proper a ribution has beengiven to all outside sources. I understand that I am solely responsible for obtaining any needed copyrigpermissions. I have obtained and a ached hereto needed wri en permission statements(s) from the

owner(s) of each thirdparty copyrighted ma er to be included in my work, allowing electronicdistribution (if such use is not permi ed by the fair use doctrine).

I hereby grant to e University of Kentucky and its agents the non-exclusive license to archive and maaccessible my work in whole or in part in all forms of media, now or herea er known. I agree that thedocument mentioned above may be made available immediately for worldwide access unless apreapproved embargo applies.

I retain all other ownership rights to the copyright of my work. I also retain the right to use in future works (such as articles or books) all or part of my work. I understand that I am free to register thecopyright to my work.

REVIEW, APPROVAL AND ACCEPTANCEe document mentioned above has been reviewed and accepted by the students advisor, on behalf of

the advisory commi ee, and by the Director of Graduate Studies (DGS), on behalf of the program; we verify that this is the nal, approved version of the students dissertation including all changes require by the advisory commi ee. e undersigned agree to abide by the statements above.

Sierra J. Enlow, Student

Dr. Ani Katchova, Major Professor

Dr. Mike Reed, Director of Graduate Studies


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While several studies examine the managerial structure of privately owned

agribusinesses, few studies take a comprehensive look at publically traded agribusinessfirms. Our study examines the historical position of agribusiness compared to themarket, and then studies the impact of the global economic and financial crisis. Theobjective of this study is to pinpoint effects of corporate financial management strategies,commonly researched in financial literature on agribusiness firms performance. Throughutilizing a quantile regression we find that agribusiness position in times of financialcrisis is directly related to firm performance. As we examine internal factors, severalinteresting impacts of managerial factors emerge. These results are useful foragribusiness firms seeking to improve their performance, as we show which managementstrategies related to capital structure, and firm size are associated with an increase in

profitability based on the performance record of the agribusiness. Additionally, we

examine how these factors impact internal financial distress of the agribusiness firms.Our conclusions clarify the impact of traditional financial management techniques onagribusiness firms and lead to questions for further research. Ultimately, the presentedresearch provides a foundational knowledge of corporate agribusinesses financial

performance.

KEYWORDS: Agribusiness Financial Performance, 2008 Financial Crisis, HistoricalAnalysis, COMPUSTAT Data, Financial Distress


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Our study focuses on the financial performance of agribusinesses and takes into

account the substantial finance literature on firm performance. An overview of existing

literature identifies indicators of firm performances, clarifying fundamental differences

between types of agribusinesses and other established firms. Agribusinesses operate with

various business models. The differing business objectives of these models necessitate

defining the separation between publicly-traded firms and other types of agribusinesses.

Researchers examine agribusiness management strategies with various

methodologies. Several studies focus on cooperative management strategies; they define

a significant portion of agribusinesses and present interesting business models to study.

Katz (1997) focuses on the managerial behavior and strategy choices in agribusiness

cooperatives while acknowledging that limited empirical research exists in examining the

differences in management behavior of cooperatives and investor-owned firms (IOFs).

Katzs study utilizes some of the same management strategies we examine throughout

our research, including measures of leverage and liquidity. Katz argues that publicly-

traded firms are fundamentally different than cooperatives; market-based measures serve

as good indicators of firm performance in publicly-traded firms while agribusiness

cooperative may have a different focus. Our analysis focuses on market-based measures

of financial success compared to Katzs focus on cooperatives member benefit.

Nilsson and Dijk (1997) work to bridge the gap between cooperatives and

publicly-traded firms in their book on strategies and structures in the agro-food

industries. They examine the impacts of mergers and acquisitions in the performance of

the U.S. food industries and the strategic behavior that leads to firm success.


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Other authors have looked at the impact of agribusinesses on the global economy.

Cook and Chaddad (2000) provide a referential framework on the global economy; their

work focuses on providing an overview of the issues related to agro-industrialization and

the role of agribusiness management in bridging the gap between agribusiness and

foreign development. Cook and Chaddad (2000) also note a shift in the early 1970s

from intra-firm to inter-firm analysis in agribusiness management literature.

Wells (1979) supports the examination of U.S. based firms as an indicator of

global economic performance. Financial literature often examines the strength of these

U.S. based multinational firms. However, strategic examination of financial performanceof agribusinesses has rarely been studied.

Existing literature has found that investor and managerial perceptions of firm

quality are highly related to measures of financial success. In an analysis of a Fortune

survey of firm managers, McQuire et. al (1990) found that although firms with high

return on assets and low debt-to-asset ratios were considered successful, other measures

of firm success (growth in sales and operating income) were not significantly related to

any of the reported qualitative performance indexes of quality. Other studies, particularly

those that focus specifically on business growth through exporting, find that sales and

sales growth are good indicators of firm success.

Liquidity as a measure of firm success has been studied in depth. Cleary (1999)

evaluates existing studies to state the investment decisions of financially-constrained

firms are more sensitive to firm liquidity than those of less constrained firms. Clearys

resulting regression finds that investment outlays are less sensitive to liquidity at different


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levels of financial constraint. In imperfect capital markets, a firms ability to make

investment decisions impacts long-term corporate planning and success.

Return on assets and return on equity are popular measures of firm performance

in financial literature. Hansen and Wernerfelt (1989) utilize return on assets as an

organization determinant of firm performance. Johnson and Soenen (2003) provide an

overview of literature related to indicators of successful companies while testing out

different measures of success for a large sample of firms. The indicators cover several

consistent measures of financial performance, including cash relative to assets, return on

equity, return on assets, a capital structure ratio and sustainable growth measuringretained earnings relative to equity. Johnson and Soenen (2003) also outline other

potential indicators of successful companies; these indicators include measures of

advertising expenditures, research and development, cash conversion cycle, and earnings

volatility.

Overall these performance indicators provide a basic foundational framework to

utilize in our study. As we move forward with additional research, we can examine how

combined measures of firm success relate to agribusiness firms. Indicators such as the

Economic Value Added (EVA), Sharpes ratio, and Jensens alpha could possibly

provide an introspective look into firm performance. The Sharpe Ratio (1966, 1994)

would provide a look at how agribusinesses perform within a portfolio. Jensens alpha

(1969) signals above market performance and has some ability to indicate free cash

flows. Economic value analysis is also used as an additional measure of stock market

performance.


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The application foundational framework borrowed from financial literature

continues through the following chapters of presented analysis.

Very few studies apply the methodologies found in financial literature to the study

of agribusinesses. Schumacher and Boland (2003) compared the business performance

(accounting profitability) for publicly-traded and cooperatively-owned food agribusiness

firms. They used return on equity as their dependent variable to study industry and

corporate effects. Our analysis of firm performance follows various aspects of the

financial literature and applies them to agribusiness firms.


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S&P

CreditRating

All FirmsFrequency

All FirmsPercent

AgribusinessFrequency

AgribusinessPercent

DistressClassification

A+ 9,378 1.86 1,182 13.50 FinancialStabilityA 17,796 3.54 625 7.14

A- 26,376 5.24 461 5.26

B+ 67,487 13.41 1,280 14.62

B 95,221 18.92 1,839 21.00B- 116,706 23.19 1,629 18.60C 132,810 26.39 1,202 13.72 Financial

DistressD 37,169 7.39 540 6.17LIQ 335 0.07 - 0

Total 503,278 100 8,758 100


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FIGURE 5.1 ROA Quantile Regression


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FIGURE 5.2 ROE Quantile Regression


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An Examination of Corporate Agribusiness Financial Performance-