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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
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/8/12/2019 An Examination of Corporate Agribusiness Financial Performance-
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REVIEW, APPROVAL AND ACCEPTANCEe document mentioned above has been reviewed and accepted by the students advisor, on behalf of
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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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