An Examination of Corporate Agribusiness Financial Performance

University of Kentucky
UKnowledge
Teses and Dissertations--Agricultural Economics Agricultural Economics
2012
AN EXAMINATION OF CORPORTE
AGRIBUSINESS FINANCIAL
PERFORMANCE: HOW AGRIBUSINESSES
PERFORM OVER TIME AND UNDER
VARIOUS CONDITIONS
Sierra J. Enlow
University of Kentucky, sierra.enlow@gmail.com
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Recommended Citation
Enlow, Sierra J., "AN EXAMINATION OF CORPORTE AGRIBUSINESS FINANCIAL PERFORMANCE: HOW
AGRIBUSINESSES PERFORM OVER TIME AND UNDER VARIOUS CONDITIONS" (2012). Teses and Dissertations--
Agricultural Economics. Paper 9.
htp://uknowledge.uky.edu/agecon_etds/9
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Sierra J. Enlow, Student
Dr. Ani Katchova, Major Professor
Dr. Mike Reed, Director of Graduate Studies

AN EXANINATI0N 0F C0RP0RATE AuRIB0SINESS FINANCIAL PERF0RNANCE:
B0W AuRIB0SINESSES PERF0RN 0vER TINE ANB 0NBER vARI00S C0NBITI0NS

TBESIS

A thesis submitteu in paitial fulfillment of the iequiiements foi the uegiee of Nastei
of Science in the College of Agiicultuie at the 0niveisity of Kentucky

By

Sieiia }. Enlow
Lexington, Kentucky
Biiectoi: Bi. Ani Katchova
Lexington, Kentucky
2u12

Copyiight Sieiia }. Enlow

ABSTRACT 0F TBESIS


While several studies examine the managerial structure of privately owned
agribusinesses, few studies take a comprehensive look at publically traded agribusiness
firms. Our study examines the historical position of agribusiness compared to the
market, and then studies the impact of the global economic and financial crisis. The
objective of this study is to pinpoint effects of corporate financial management strategies,
commonly researched in financial literature on agribusiness firms performance. Through
utilizing a quantile regression we find that agribusiness position in times of financial
crisis is directly related to firm performance. As we examine internal factors, several
interesting impacts of managerial factors emerge. These results are useful for
agribusiness firms seeking to improve their performance, as we show which management
strategies 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 on
agribusiness firms and lead to questions for further research. Ultimately, the presented
research provides a foundational knowledge of corporate agribusinesses financial
performance.

KEYWORDS: Agribusiness Financial Performance, 2008 Financial Crisis, Historical
Analysis, COMPUSTAT Data, Financial Distress

Sieiia }. Enlow

Novembei 1S, 2u12


By

Sieiia }. Enlow

Bi. Ani Katchova
________________________________________________
Biiectoi of Thesis

Bi. Nike Reeu
________________________________________________
Biiectoi of uiauuate Stuuies

Novembei 1S, 2u12
________________________________________________
Bate

!" #$ %&'())'))$* +"%%$* ,"& -(./-&-(% #0 1" 2"#/3010 #$ #'.10&4. )0%&00

iii

TABLE 0F C0NTENTS

List of Tables........................................iv

List of Figuies..........................................v

Chaptei 0ne: Intiouuction................................1

Chaptei Two: Liteiatuie Review..............................4

Chaptei Thiee: Bata....................................8

Chaptei Foui: Bistoiical Peifoimance of Agiibusiness.....................14
4.1 Financial iatios.................................1S
4.2 Results anu finuings...............................19
4.S Concluuing iemaiks...............................2S

Chaptei Five: Agiibusiness peifoimance unuei global systematic shock.........27
S.1 Econometiic Nouel-Quantile Regiession..................29
S.2 vaiiable Selection anu Besciiption.......................S1
S.S Quantile Regiession Results.........................SS
S.4 Concluuing iemaiks on agiibusiness peifoimance in conuitions of
systematic shock..................................41

Chaptei Six: Examining the inteinal health of agiibusiness fiims.............4S
6.1 Econometiic Nouel-Piobit.........................46
6.2 vaiiable Selection anu Besciiption......................47
6.S Piobit Results................................S1
6.4 Concluuing iemaiks on financial uistiess in Agiibusiness Fiims......SS

Chaptei Seven: 0veiall Conclusions.............................S6

Refeiences........................................S8

vita............................................62

iv

LIST 0F TABLES

TABLE S.1 SIC Coues foi Agiibusiness Fiims......................1u
TABLE 4.1 S & P Cieuit Ratings.................................1S
TABLE 4.2 Financial Ratios Befinitions anu Foimulas.................16
TABLE 4.S Financial Peifoimance of Agiibusinesses anu All Fiims by Yeai..... 2u
TABLE S.1 vaiiable Besciiptions..............................S4
TABLE S.2 R0A 0LS Regiession Results........................S7
TABLE S.S R0A Quantile Regiession .2S Results....................S7
TABLE S.4 R0A Quantile Regiession .Su Results....................S7
TABLE S,S R0A Quantile Regiession .7S Results....................S7
TABLE S.6 R0E 0LS Regiession Results........................S8
TABLE S.7 R0E Quantile Regiession .2S Results....................S8
TABLE S.8 R0E Quantile Regiession .Su Results....................S8
TABLE S.9 R0E Quantile Regiession .7S Results....................S8
TABLE 6.1 S & P Rankings.................................48
TABLE 6.2 vaiiable Besciiptions..............................S1
TABLE 6.S Piobit Results................................S2

v

LIST 0F FIu0RES
FIu0RE S.1 Quaiteily Peifoimance of Agiibusiness Sectoi anu Naiket Total
Sales.......................................12
FIu0RE 4.1 Financial Ratios foi Agiibusinesses anu All Fiims foi 1971-2u11....2S
FIu0RE S.1 R0A Quantile Regiession..........................S9
FIu0RE S.2 R0E Quantile Regiession..........................4u

1

!"#$%&' ()&* +)%',-./%0,)
The teim agiibusiness fiist appeais in publications aiounu the miu-2u
th

centuiy. The concept of agiibusiness is intiouuceu by Bavis anu uolubeig's
ieseaich at the Baivaiu Business School (Bavis anu uolubeig 19S7). Eaily stuuies
into agiibusinesses focuseu on agiibusiness iole in helping the small faimeis
(uolusmith 198S) anu on the position of agiibusinesses in maiket stiuctuie
(uolubeig 196S). uolubeig continueu his woik uefining the iole of agiibusiness
with his aiticle on the iole of multinational companies (uolubeig 1981).
Loosely uefineu the teim agiibusiness can encompass eveiything fiom a
piouuction agiicultuie opeiation to a multinational company. The 0SBA Economic
Reseaich uses such a uefinition to uefine a foou anu fibei system:
56%&-78.-(0.. 2"#/&-.0. 190 02"("#-2 '21-:-1-0. ", 190 ,'&#. '() 190 ,-&#. 19'1
'..0#730* /&"20..* '() 1&'(.,"&# &'; '%&-28318&'3 2"##")-1-0. -(1" ,-('3
/&")821. ,"& )-.1&-781-"( 1" <=>= '() ,"&0-%( 2"(.8#0&.= 6%&-78.-(0.. -(238)0.
'33 02"("#-2 '21-:-1$ 19'1 .8//"&1. ,'&# /&")821-"( '() 190 2"(:0&.-"( ", &';
,'&# /&")821. 1" 2"(.8#'730 %"").?,"& 0@'#/30A #'29-(0&$ &0/'-&* ,0&1-3-B0&
/&")821-"(* ,'&#-(% -1.03,* ,"") /&"20..-(% '() #'(8,'218&-(%* 1&'(./"&1'1-"(*
;9"30.'30 '() &01'-3 1&')0* )-.1&-781-"( ", ,"") '() '//'&03* '() 0'1-(%
0.1'73-.9#0(1.= !90 -(2"#0 '() 0#/3"$#0(1 %0(0&'10) ;-19-( 6%&-78.-(0.. -.
190 -(2"#0 0'&(0) '() C"7. /&":-)0) 7$ 190.0 ,-&#.=D

In iecent liteiatuie the teim agiibusiness is moie commonly utilizeu to
uesciibe laigei opeiations that have a coipoiate stiuctuie, incluuing many that have
an inteinational scope. Bistoiically, multinational enteipiises in the foou system
spiawl acioss national bounuaiies filling a voiu in the veitical foou system fiom
faim suppliei to ultimate consumei anu caiiying on those functions of input
technology, faiming, giauing, assembly, stoiage, piocessing, anu uistiibution that

2

eithei aie not peifoimeu at all oi ineffectively peifoimeu by otheis in the total
veitical foou system we call 'agiibusiness' (uolubeig 1968).
Agiibusinesses opeiate unuei seveial uiffeient business mouels.
Coopeiatives iemain populai in this inuustiy. Tiauitionally, agiicultuie
coopeiatives aie piouucei-uiiven pioviuing a ietail outlet that yielus a highei piofit
maigin. 0thei coopeiative stiuctuies exist in uiffeient paits of this maiket sectoi,
incluuing consumei coopeiatives anu coopeiatives uesigneu to meet the uemanu
cieateu by goveinment manuates.
Seveial authois lookeu at the iole of coopeiatives in the agiicultuial inuustiy
anu the unique management stiategies associateu with those oiganizations. These
stuuies have founu that manageiial factois anu consumei ielationships aie
impoitant stiategies foi success. Leiman anu Pailiament (199u) stuuieu the
ielationship between the compaiative financial peifoimance of coopeiatives anu
investoi-owneu fiims (I0Fs) in the fiuit anu vegetable piocessing anu the uaiiy
inuustiies fiom 1976 thiough 1987. They founu the coopeiatives in both inuustiies
weie peifoiming as well as oi bettei than the compaiable I0Fs using piofitability,
leveiage, anu inteiest coveiage measuies (Leiman anu Pailiament 199u). The lack
of significant uiffeiences in piofitability between the two types of fiims suggests
that coopeiatives may be following goals similai to I0Fs (Leiman anu Pailiament
199u).
uianteu that coopeiatives, anu seveial othei stiuctuies of agiibusinesses,
can issue stocks, these businesses aie not the publicly-tiaueu fiims we consiuei in
oui analysis. 0thei authois have stuuieu the peisistence of piofitability in the foou

S

anu agiibusiness inuustiy (Schumachei anu Bolanu 2uuS), anu incluueu
coopeiatives in theii analysis. 0ui inteiest iemains pieuominately focuseu on the
financial peifoimance of those businesses that tiaue in the public sectoi.
Publicly-tiaueu agiibusinesses aie uefineu as those that tiaue on the open
maiket (a stock exchange oi an ovei-the-countei maiket). The owneis of the
publicly-tiaueu companies aie inuiviuual anu institutional shaieholueis who holu
stocks issueu by the company. Publicly-tiaueu companies have gieatei access to
financing because they can issue moie stock but aie also subject to moie iegulation
in teims of filing iequiiements anu coipoiate taxes. Publicly-tiaueu agiibusinesses
have not ieceiveu much attention in the liteiatuie even though substantial
inuicatois point to theii economic stiength as a maiket sectoi.
Chaptei Two examines the existing liteiatuie ielateu to coipoiate
agiibusiness peifoimance. Chaptei Thiee pioviueu infoimation on the uata souice
we use in oui analysis. Chaptei Foui evaluates economic inuicatois ielateu the
maiket anu an agiibusiness sample. Chapteis Five anu Six stiive to builu upon the
founuations of financial liteiatuie anu apply econometiic tools to a new uataset.
Chaptei Seven contains some geneial conclusions about the analysis of pievious
chapteis anu will evaluate questions foi fuithei ieseaich.

4

!"#$%&' 12,* 30%&'#%.'& 4&50&2
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.

S

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 performance
of 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

6

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 measuring
retained 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.

7

The application foundational framework borrowed from financial literature
continues through the following chapters of presented analysis. Coau anu Rao (2uu6)
utilize a quantile iegiession to look at maiket behavioi in ielation to innovation.
Piobit iegiessions aie common thioughout financial liteiatuie in examining
questions of likelihoou ielative to fiim uistiess.
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.

8

!"#$%&' 1"'&&* 6#%#
This oveiview of coipoiate agiibusiness peifoimance focuses exclusively on those
publicly-tiaueu fiims foi which the financial uata is founu in the C0NP0STAT Noith
Ameiica Bata, a uatabase of 0.S. anu Canauian funuamental anu maiket uata. The
C0NP0STAT Noith Ameiica uatabase is stanuaiuizeu accoiuing to financial
statement piesentation anu specific uata item uefinitions assuiing consistent,
compaiable uata foi company anu inuustiy analysis (Stanuaiu & Pooi's). ueneially
Accepteu Accounting Piinciples (uAAP) accepteu anu uefineu by the 0niteu States
feueial accounting stanuaius auvisoiy boaiu fuithei stanuaiuizes the uata
uefinitions in C0NP0STAT.
The uata foi this stuuy is obtaineu fiom the Stanuaiu & Pooi's C0NP0STAT
uataset accesseu via the Whaiton Reseaich Bata Seivice at the 0niveisity of
Pennsylvania. The C0NP0STAT uata oiganizes companies in teims of uvKEY coues
anu the Stanuaiu Inuustiial Classification (SIC). C0NP0STAT has uefineu a
piopiietaiy iuentifiei, the uvKEY, foi each company in the uatabase. The uvKEY can
be useu to tiack a company ovei time, while the company name, C0SIP, oi tickei
may change ovei time. The Stanuaiu Inuustiial Classification (SIC) iepiesents a 2u
th

centuiy uevelopment on behalf of the 0niteu States uoveinment uesigneu to
uistinguish between companies in a systematic mannei. Noie iecently the SIC
coues weie ieplaceu by Noith Ameiican Inuustiy Classification System (NAICS)
staiting in 1997. The SIC anu NAICS classify companies by theii piimaiy type of
business. In this stuuy, we utilize SIC coues to maintain consistency with eailiei
yeais foi which uata aie available, but theie is a close coiiesponuence between SIC

9

anu NAICS coues in teims of company classifications. We also use financial uata
staiting in 1961, although uata in eailiei yeais is less ieliable so we concentiate
most of oui uiscussion on latei yeais.
This uataset contains some limitations foi a histoiical analysis. Bata piioi to
196u is unavailable anu incomplete in some cases. Bowevei, some authois suggest
that post-wai economies expeiience a peiiou of stiuctuial change (van Aik 199S).
This shift in policy changeu the position of Ameiican companies, allowing them to
giow into multinational opeiation. The funuamental uiffeiences in tiaue policy
coulu possibly waiiant the consiueiation of a sepaiate in uepth stuuy foi uata piioi
to 196u. Bavis (19S6) conceptualizes the uefinition of agiibusiness -"sum total of
all opeiations involveu in the piouuction anu uistiibutions of foou anu fibeis"
iefeiiing to the post-WWII phenomenon of incieasing "unifieu functions" anu the
"inteiuepenuency" between the agiicultuial piouuction sectoi anu the pie- anu
post-faim gate business woilu.
Foi this analysis we consiuei agiibusiness fiims that piouuce foou anu
kinuieu piouucts with SIC 2-uigit coues of 2u (TABLE S.1). Specifically, these foou
manufactuiing anu piocessing agiibusinesses piouuce meat piouucts, uaiiy
piouucts, canneu, fiozen, anu pieseiveu fiuits anu vegetable piouucts, giain mill
piouucts, bakeiy piouucts, sugai anu confectionaiy piouucts, fats anu oils, anu
beveiages. Nost of the obseivations (in teims of company's quaiteily financial
uata) aie foi beveiages, meat piouucts, canneu, fiozen, anu pieseiveu fiuits anu
vegetables. Theie aie 48S unique agiibusinesses that aie classifieu as foou piouuct
manufactuiing companies foi the peiiou of 1961 to 2u11. 0n aveiage, they iepoit

1u

uata foi S2 quaiteis (1S yeais), foi a total of 2S,28S quaiteily obseivations of uata
foi agiibusiness fiims. }ointly with the iest of the companies, theie aie S1,741
unique companies in the C0NP0STAT uata fiom 1961 to 2u11 that we use in the
analysis foi all fiims.
Table S.1 SIC Coues foi Agiibusiness Fiims
Inuustiy uioups SIC Coues Numbei of
0bseivations
E"") '() F-()&0) G&")821. H#'C"& %&"8/ ,"& -()8.1&$
%&"8/. 3-.10) 703";I 2u 2S,28S
Neat Piouucts 2u1 4,u44
Baiiy Piouucts 2u2 1,9S9
Canneu, Fiozen, anu Pieseiveu Fiuits, vegetables, anu
Foou Specialties 2uS
S,61S
uiain Nill Piouucts 2u4 2,64S
Bakeiy Piouucts 2uS 1,689
Sugai anu Confectioneiy Piouucts 2u6 2,726
Fats anu 0ils 2u7 7uu
Beveiages 2u8 7,9u9
Niscellaneous Foou Piepaiations anu Kinuieu Piouucts 2u9 u
J"10.A >KL M)-%-1 2")0. &0/&0.0(1 190 #'C"& %&"8/ '() >KL N)-%-1 2")0. &0/&0.0(1 190
-()8.1&$= J8#70& ", "7.0&:'1-"(. -. 190 (8#70& ", ,-&#.O8'&10& "7.0&:'1-"(. -(
L"#/8.1'1 ,"& PQRPMSPM=

Fuitheimoie, C0NP0STAT lacks bankiuptcy uata in the Noith Ameiican
Quaiteily Funuamentals uatabase. The inclusion of this infoimation woulu
stiengthen the analysis of histoiical financial peifoimance anu fiim financial
uistiess. In this stuuy, we use S&P cieuit iatings to inuicate financial uistiess of a
company. Companies which aie also boiioweis aie iateu on a scale fiom AAA to B
to inuicate ianges fiom financial stiength to financial uistiess. These scoies aie
baseu on a numbei of metiics anu C0NP0STAT's iecoiu of S&P iatings ieflects the

11

cuiient S&P iating system, aujusting histoiical scoies to be compaiable with touay's
classification of coipoiations.
Auuitional infoimation not incluueu in C0NP0STAT anu neeueu foi oui
analysis has been founu thiough seveial othei souices. Infoimation on peiious of
economic uecline is available thiough the National Buieau of Economic Reseaich
(NBER). The National Buieau of Economic Reseaich iuentifies seveial uiffeient
peiious of economic uecline since 1961. To accommouate a moie uynamic viewing
iange, FIu0RE S.1 shows those peiious of economic uecline that occui between
198S anu the piesent; these peiious aie shaueu on the tables. The }uly 199u-Naich
1991 8-month uecline was initiateu by monetaiy policy anu intensifieu by the gulf
ciisis anu followeu by a peiiou of stiong giowth. The buist of the uot-come bubble
biought this peiiou of giowth came to an enu in Naich 2uu1 anu usheieu in anothei
8-month uecline that was intensifieu by Septembei 11
th
. A shoit iecoveiy lasteu
until an 18-month uecline that began in Becembei 2uu7 anu enueu in }une 2uu9.
This peiiou incluues the Financial Ciisis of 2uu8 anu holus the notable achievement
of the longest peiiou of uecline since the uieat Bepiession, which lasteu 4S months.
Notably, the peiiou of uecline fiom Becembei 2uu7 to }une 2uu9 has the
most volatile impact on total sales. This iecession is chaiacteiizeu by a global
impact anu is significant because it uemonstiates that it takes a global iecession to
impact multinational companies. We finu that the 2uu8 Recession hau uiffeiing
impacts on Agiibusinesses with iespect to size anu utilize the 2uu8 Financial Ciisis
in oui ieseaich as oui vaiiable of systematic shock. The inteiesting impacts of the

1
2

FIu0RE S.1 Quaiteily Peifoimance of Agiibusiness Sectoi anu Naiket Total Sales
u
1uuuuu
2uuuuu
Suuuuu
1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S 1 S
198S1986198719881989199u19911992199S1994199S19961997199819992uuu2uu12uu22uuS2uu42uuS2uu62uu72uu82uu92u1u
78'09.:0)&:: 1,%#; <#;&:
u
2uuuuuu
4uuuuuu
6uuuuuu
8uuuuuu
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1S

2uu8 Financial Ciisis will be examineu fuithei in uepth with a quantile iegiession in
chaptei five.
Foi common financial iatios, constiucteu out of C0NP0STAT uata but not
incluueu in the actual uatabase, we consult financial liteiatuie anu have maue
notations when the iatios aie incoipoiateu in oui ieseaich.

14

!"#$%&' ?,.'* @0:%,'0/#; A&'B,'C#)/& ,B 78'09.:0)&::
The financial anu economic climate in which agiibusiness peifoim has been
chaiacteiizeu by seveial ebbs anu flows in the time peiiou fiom 1961 to the piesent.
veiy little ieseaich has been uone to examine the histoiical financial peifoimance of
agiibusinesses. As we stiive to fill this gap in existing ieseaich, we uiaw
infoimation fiom the financial liteiatuie to ueteimine the inuicatois to uefine
successful agiibusiness peifoimance.
We begin oui analysis by pioviuing a basic oveiview of S&P cieuit iatings
compaiing agiibusiness anu all fiim peifoimance. The S&P cieuit iatings signal
financial stability anu financial uistiess to investois. TABLE 4.1 outlines the
compaiison, anu we see that agiibusinesses have peifoimeu somewhat bettei than
all fiims in teims of the piopoition of companies falling into each of the cieuit
iatings.
We finu that no agiibusinesses have moveu into liquiuation anu they exhibit
highei peicentages of companies with S&P iatings above the scoie of C, when
compaieu to the maiket of all fiims. The maiket of all fiims shows SS peicent of
companies signaling financial uistiess with an S&P cieuit iating of C oi lowei. This
is compaieu to the agiibusiness sample wheie only 2u% eain that classification,
showing lowei piopoition of agiibusiness fiims aie in uistiess. Slightly fewei
agiibusinesses aie in the piocess of ieoiganization, uemonstiateu by the S&P cieuit
iating of B. Buiing this time peiiou, no agiibusinesses weie classifieu in the stages
of coipoiate liquiuation.

1S

TABLE 4.1 S & P Cieuit Ratings
S&P
Credit
Rating
All Firms
Frequency
All Firms
Percent
Agribusiness
Frequency
Agribusiness
Percent
Distress
Classification
A+ 9,378 1.86 1,182 13.50 Financial
Stability
A 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 21.00
B- 116,706 23.19 1,629 18.60
C 132,810 26.39 1,202 13.72 Financial
Distress
D 37,169 7.39 540 6.17
LIQ 335 0.07 - 0
Total 503,278 100 8,758 100

As we continue examining financial peifoimance of companies, one can
examine eithei the absolute peifoimance in teims of the scale of opeiation (balance
sheet anu income statement items) oi the ielative peifoimance in teims of financial
iatios. Ratios allow us to scale foi factois, such as size, that vaiy within an inuustiy
anu acioss inuustiies. These measuies facilitate the compaiison between
companies anu allow us to examine agiibusiness peifoimance veisus all fiim
peifoimance. These financial peifoimance measuies can be useu to compaie
peifoimances ovei time, acioss inuustiies, against benchmaiks, oi within segments
of a paiticulai business.
4.1 Financial Ratios
We incluue five uiffeient types of financial iatios into oui analysis to measuie
piofitability, liquiuity, fiim activity, solvency anu maiket peifoimance foi a total of
twelve specific iatios. In auuition to these financial iatios we also iepoit measuies
of vaiious items fiom the balance sheet anu income statement. TABLE 4.2 iepoits

1
6
Table 4.2 Financial Ratios Befinitions anu Foimulas
Financial
Ratios
Inuicatois Foimulas Compustat Coue
Piofitability Retuin on Equity Net IncomeEquity NIQCEQQ
Retuin on Assets Net IncomeTotal Assets NIQATQ
uioss Naigin Ratio (Net Sales - Cost of uoous Solu) Net Sales (SALEQ-C0uSQ)SALEQ
Piofit Naigin Ratio Net Income Net Sales NIQSALEQ
Liquiuity Cuiient Ratio Cuiient AssetsCuiient Liabilities ACTQLCTQ
Quick Ratio (Cuiient Assets - Inventoiies)Cuiient Liabilities (ACTQ-INvTQ)LCTQ
Activity
(Efficiency)
Ratios
Asset Tuinovei Net SalesTotal Assets SALEQATQ
Solvency
Ratios
Bebt to Asset Ratio Total BebtTotal Assets LTQATQ
Long Teim Bebt to Asset Ratio Long Teim BebtAssets BLTTQATQ
Asset to Equity Ratio Total AssetsEquity ATQCEQ
Naiket Ratios Eainings Pei Shaie Net EainingsNumbei of Shaies EPSPXQ
PE Ratio Naiket Piice Pei ShaieBiluteu Eainings Pei Shaie PRCCQEPSFXQ
Balance Sheet
anu
Total Assets Total Assets ATQ
Income
Statement
Total Liabilities Total Liabilities LTQ
Equity Equity CEQ
Sales Net Sales SALESQ
Net Income Net Income NIQ
Retaineu Eainings Retaineu Eainings REQ

17

the majoi financial iatios, the specific inuicatois useu to measuie these financial
iatios, the foimulas useu foi calculating them, anu the C0NP0STAT coues foi
calculating these financial iatios baseu on the Quaiteily C0NP0STAT uatabase.
The long-teim piofitability of a company is vital foi the company's suivival
anu to ensuie that auequate benefits aie ieceiveu by its shaieholueis. Piofitability
examines the amount of piofit a company geneiates on its sales at uiffeient stages of
an income statement. Piofitability can be measuieu in a numbei of uiffeient ways.
Retuin on equity (R0E) examines fiim peifoimance ielative to equity. Retuin on
assets (R0A) examines fiim peifoimance in teims of total assets anu evaluates how
efficiently assets aie useu. The gioss maigin iatio looks at gioss piofit (net sales -
cost of goous solu) foi the net sales that a company geneiates, wheieas a net piofit
maiking iatio looks at net income to net sales. The piofit maigin iatio seives as an
inuicatoi of how well a company contiols inteinal costs to geneiate piofits fiom its
sales.
Liquiuity iatios measuie the company's ability to pay off its shoit-teim uebt
obligations. This is uone by compaiing company's most liquiu assets (those that can
easily be conveiteu to cash) to shoit-teim liabilities. We use two iatios to measuie
liquiuity. The cuiient iatio is a measuie of the company's shoit-teim financial
stiength. Acceptable cuiient iatios ianges uiffei fiom inuustiy to inuustiy, but
iatios above 1 inuicate ability to covei shoit-teim liabilities. 0ui measuie of cuiient
iatio is calculateu as cuiients assets uiviueu by cuiient liabilities. Similai to the
cuiient iatio, the quick iatio measuies company's financial health in the shoit iun
but it excluues inventoiies which aie not as easily conveiteu to cash.

18

Activity iatios pioviue a measuie of the company's iesouice utilization. The
asset tuinovei iatio ieflects net sales ielative to total assets. A high asset tuinovei
iatio uemonstiates effective utilization of company assets, an opeiating efficiency
we like to see in the analysis of financial peifoimance. 0thei activity iatios coulu
incluue the cash conveision cycle oi a measuie of change in opeiating leveiage.
0thei iatios examine the solvency position of the fiims. They measuie the
company's oveiall uebt loau in ielation to the mix of uebt anu equity. The gieatei
the amount of uebt helu by a company, the gieatei the financial iisk of a bankiuptcy.
The uebt-to-asset iatio measuies total uebt ielative to total assets anu the long-teim
uebt-to-asset iatio examines a fiim's long-teim position by uiviuing long-teim uebt
by total assets. The thiiu incluueu solvency iatio measuies assets ielative to equity,
which is also nameu equity multipliei.
We incluue two maiket iatios into oui analysis. Stockholueis often consult
eainings pei shaie to gauge a company's position. Companies aie iequiieu by
feueial law to iepoit on eainings pei shaie as an item on theii income statement
iepoit; this item is available in the C0NP0STAT uatabase. Also, the piice eainings
(PE) iatio is incluueu as measuie of maiket peifoimance. The PE iatio examines
the maiket piice of common stock pei shaie ielative to the company's eainings pei
shaie.
While iatios pioviue scaleu compaiisons between companies anu inuustiies,
finite measuies of fiim peifoimance allow us to examine chaiacteiistics of
agiibusiness compaieu to all fiims. We incluuing six balance sheet anu income

19

statement items to continue to examine the peifoimance of agiibusinesses: total
assets, total liabilities, equity, sales, net income, anu ietaineu eainings.
4.2 Results anu Finuings
We use financial iatios to compaie the financial peifoimance of foou piouucing
agiibusinesses to the peifoimance of all publicly-tiaueu companies. Table S iepoits
the financial iatios as well as balance sheet anu income statement items foi
agiibusinesses anu all fiims using quaiteily C0N0PSTAT uata foi 2uu8-2u11. We
concentiate on compaiing the peifoimance measuies using meuians as opposeu to
means. Financial iatios typically contain outlieis that skew the means foi these
financial iatios, while the use of meuians uoes not suffei fiom this pioblem.
TABLE 4.S shows that the meuian agiibusiness peifoimance compaies veiy
well to the all-fiim meuian with iespect to piofitability. Agiibusinesses yielu highei
peifoimance on thiee out of foui of the piofitability iatios that we utilize in oui
analysis. Foi the last foui yeais, the agiibusiness meuian exceeueu the all fiim
meuian on ietuin on equity anu piofit maigin iatio. The agiibusiness meuian also
exceeueu the meuian foi the all fiims in two out of the foui pievious yeais.
Agiibusinesses slightly unueipeifoimeu the all-fiim meuian on gioss piofit maigin.
The meuian ietuin on equity iangeu fiom 2.4% to S.4% in the pievious foui yeais
foi agiibusinesses while it was between 1.1% anu 1.7% foi all fiims. We expect
ietuin on assets to be lowei than ietuin on equity aftei accounting foi financial
leveiage. Neuian ietuin on assets vaiieu between u.9% to 1.S% foi agiibusinesses
anu between u.1% anu u.S% foi all fiims, which aie somewhat low numbeis
ieflecting the effects of the iecent economic iecession.

2
u
Table 4.S Financial Peifoimance of Agiibusinesses anu All Fiims by Yeai
Agiibusinesses All Fiims
2uu8 2uu9 2u1u 2u11 2uu8 2uu9 2u1u 2u11
Retuin on Equity u.u24 u.uS4 u.uS4 u.u28 u.u1S u.u11 u.u17 u.u17
Retuin on Assets u.uu9 u.u14 u.u1S u.u12 u.uu1 u.uu1 u.uuS u.uu2
uioss Naigin Ratio u.S26 u.S4S u.S47 u.SS9 u.SS4 u.SSS u.S7S u.S79
Piofit Naigin Ratio u.u24 u.uS4 u.uS4 u.u28 u.u1S u.u11 u.u17 u.u17
Cuiient Ratio 1.S12 1.6uS 1.71u 1.642 1.744 1.767 1.828 1.8S7
Quick Ratio u.82u u.981 1.uS2 1.u18 1.Su2 1.SS9 1.4uS 1.S92
Asset Tuinovei u.291 u.287 u.281 u.274 u.1S7 u.127 u.1S1 u.127
Bebt to Asset Ratio u.S1S u.49S u.468 u.481 u.S49 u.SSS u.SS4 u.S29
Long Teim Bebt to Asset Ratio u.1S7 u.1S9 u.1S1 u.1S8 u.u86 u.u79 u.u66 u.u64
Asset to Equity Ratio 1.871 1.897 1.762 1.796 1.88S 1.8SS 1.79S 1.8u7
Eainings Pei Shaie u.1uu u.18u u.19u u.17u u.u1u u.uuu u.uSu u.u4u
PE Ratio 41.6S9 42.9uS 49.u78 44.667 18.Suu 11.96S 29.64S Su.uuu
Total Assets (Nillion $) 4SS.268 492.4u6 461.297 SS8.814 291.124 288.u7S Su6.u2u SSu.46u
Total Liabilities (Nillion $) 174.S7S 2uS.uu1 192.4S1 27u.72S 124.SSu 124.781 126.674 14S.61u
Equity (Nillion $) 17u.642 181.u8S 217.498 222.72S 9S.4Su 89.786 1u2.48S 12u.786
Sales (Nillion $) 129.4Su 1SS.6u8 1SS.2S1 16S.7u6 S1.928 Su.u9u S2.2u6 S7.17u
Net Income (Nillion $) 1.92S 4.24u 6.618 S.217 u.277 u.187 u.719 u.842
Retaineu Eainings (Nillion $) 48.2u2 S1.162 SS.87u 78.711 -u.uS4 -1.88S -1.1S6 -u.71S
Numbei of FiimQuaitei 0bseivations S42 S27 S1S 497 4S,49S 4S,u46 4S,1S2 41,969
J"10.A L'3283'1-"(. '&0 7'.0) "( O8'&10&3$ )'1' ,&"# LTUG<>!6! ,"& .030210) $0'&.= !90 &0/"&10) (8#70&. '&0 #0)-'(.=

21

0vei the pievious foui yeais, agiibusinesses uemonstiate a slightly lowei
cuiient iatio of 1.642 than the meuian iatio foi all fiims of 1.8S4 foi 2u11. uiven
that the cuiient iatio acceptable ianges uiffei acioss inuustiies, these iesults show
auequate liquiuity. The quick iatio foi agiibusinesses has giauually iisen ovei the
yeais, inuicating that eithei inventoiies have uecieaseu oi that the ielationship
between cuiient assets anu cuiient liabilities has changeu.
Agiibusinesses outpeifoim all fiims with iespect to the asset tuinovei iatio
with iatios of u.274 foi agiibusinesses anu u.127 foi all fiims in 2u11; this iesult
suggests agiibusinesses geneiate twice moie sales fiom theii assets. This iatio
vaiies acioss inuustiies, anu the iesult is likely attiibuteu to that vaiiation. 0ui
uataset excluues agiibusinesses ietaileis, which is substantial to note when
inteipieting this iesult. Retaileis typically have the highest asset tuinovei iatios as
a ieflection of the competitive anu high tuinovei natuie of theii inuustiy. Futuie
ieseaich with an expanueu uataset incluuing ietaileis woulu likely fuithei suppoit
oui conclusions foi the asset tuinovei iatio.
Agiibusinesses have slightly moie long-teim uebt compaieu to assets than
the all fiim meuian iesult, but have slightly lowei oveiall uebt-to-asset iatios. The
compaiison theoiizes that agiibusinesses stiuctuie less of theii uebt in shoit-teim
liabilities anu moie in long-teim uebt. This is a paiticulaily inteiesting iesult
iegaiuing the stiuctuie of agiibusiness uebt compaieu to the all fiim meuian.
In teims of maiket peifoimance, we finu that agiibusinesses outpeifoim all
fiims in teims of meuian peifoimance. Agiibusinesses show stiong eainings pei
shaie compaieu to all fiims. As an impoitant note, the meuian PE iatio foi

22

agiibusinesses is uiastically highei than the all-fiim meuian. To the aveiage
investoi compaiing stock peifoimance, with knowleuge of the PE iatio,
agiibusinesses woulu appeai to be a less uesiiable investment than a fiim with the
meuian PE of all fiims. Bowevei, acceptable PE iatios uiffei with the inuustiy anu
oui iesult is useful in pioviuing infoimation on how the agiibusiness sectoi
compaies to othei sectois.
When examining balance sheet anu income statement items, we note that the
meuian agiibusiness tenus to be laigei in size than the meuian of all fiims. We finu
that agiibusinesses have highei sales, assets, net income anu ietaineu eainings than
all fiims. Bowevei, agiibusinesses also have highei total liabilities. These iesults
pioviueu some basic infoimation on agiibusinesses anu expanu the compaiison
pioviueu by oui analysis of financial iatios.
In auuition to the statistics in TABLE 4.S piesenteu foi 2uu8 to 2u11, we plot
some of the financial iatios ovei longei peiious of time foi a moie compiehensive
oveiview of agiibusiness peifoimance compaieu to all fiims. Financial uata in the
196us in C0NP0STAT is fiequently missing oi less ieliable; theiefoie, each of the
chaits uisplayeu in FIu0RE 4.1 show the tienus of agiibusinesses compaieu to all
fiims fiom 1971 to 2u11. The tienus ovei time coiiesponu with oui pievious
iesults fiom Table 4.S; we finu that agiibusinesses outpeifoim all fiims in seveial
categoiies. The meuian cuiient iatio anu meuian quick iatio show agiibusinesses
have lowei liquiuity than that foi all fiims, showing uiffeiences in the foou
manufactuiing sectoi. The solvency iatios also show changes ovei time, but similai
oveiall iatios. Agiibusinesses consistently show highei asset tuinovei iatios ovei

2
S
FIu0RE 4.1 Financial Ratios foi Agiibusinesses anu All Fiims foi 1971-2u11

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2
4
FIu0RE 4.1 Financial Ratios foi Agiibusinesses anu All Fiims foi 1971-2u11 (Continueu)

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1
1
=&-0#) 7::&%%,DE.0%F 4#%0,

2S

the last 4u yeais. In teims of piofitability measuies such as ietuin on equity anu
ietuin on assets, agiibusinesses consistently show bettei peifoimance in the past
foui uecaues.
4.S Concluuing Remaiks
We acknowleuge existing liteiatuie anu apply the techniques founu in the
liteiatuie to an agiibusiness sample in oiuei to examine theii histoiical coipoiate
peifoimance. Chaptei thiee stiives to examine how publicly-tiaueu agiibusinesses
peifoim financially compaieu to all fiims ovei the peiiou fiom 1961 to 2u11. We
utilize inuicatois of company success, incluuing financial iatios anu balance
sheetincome statement items, to compaie agiibusiness fiims to all fiims in the
maiket. We peifoim the analysis annually anu foi companies that iepiesent the
meuian anu the 2S
th
anu 7S
th
peicentiles of peifoimance. We finu that
agiibusinesses outpeifoim at the meuian the gioup of all fiims in teims financial
iatios ielateu to piofitability, liquiuity, anu maiket iatios, but they have slightly
lowei liquiuity anu uebt iatios. The stiong financial peifoimance of foou piocessing
agiibusinesses makes them valuable investing options paiticulaily uuiing the iecent
economic iecession. These finuings contiibute to existing ieseaich by examining
the common inuicatois of coipoiate success on agiibusinesses, pioviuing the
founuational knowleuge to conuucteu auuitional analysis on agiibusiness financial
peifoimance.
Questions foi fuithei ieseaich have aiisen thioughout the piesenteu
analysis. Theie aie seveial points that coulu stiengthen oui examination of the
financial peifoimance of agiibusinesses. Examining if stiuctuial bieaks exist in the

26

uata woulu iuentify specific peiious to focus on foi fuithei analysis. Regiession
analysis coulu contiibute to answeiing the question as to what factois sepaiate
agiibusinesses fiom all fiims in teims of peifoimance. Bettei uata woulu allow the
inclusion of inuicatois such as fiee cash flows anu expoit sales. While the piesenteu
ieseaich in chaptei thiee contiibutes to liteiatuie by iuentifying the impacts of
common measuie of financial success on agiibusiness, it uoes not iuentify measuies
that sepaiate agiibusinesses fiom the iest of the maiket.
The objective the ieseaich piesenteu in the following chapteis focuses on
examining the inteinal anu exteinal influences anu theii effect on coipoiate
agiibusinesses' peifoimance. Nanageiial factois impact agiibusinesses at an
inteinal level while maiket factois influence agiibusinesses acioss the boaiu, but
have uiffeient impact on high peifoiming anu low peifoiming fiims. As this chaptei
uiscusseu the histoiical peifoimance of agiibusinesses, following chapteis will
examine the maiket impact on agiibusiness peifoimance, paiticulaily the impact of
a global financial ciisis, anu examine the inteinal health of agiibusiness fiims.
0ui examination into the impact of a global event on agiibusiness
peifoimance looks at the impact of financial ciisis, how it uiffeis among high anu
low peifoiming fiims anu how vaiious manageiial uecisions can compensate foi
systematic shocks to the maiket. As we continue to expanu this section of analysis
in the futuie, we will woik to iuentify chaiacteiistics that sepaiate agiibusiness fiim
fiom the maiket anu if theie aie management stiategies specific to agiibusinesses
that help them stanu the test of time.

27

!"#$%&' ?05&* 78'09.:0)&:: A&'B,'C#)/& .)-&' 8;,9#; :F:%&C#%0/ :",/>H

The global economic anu financial ciisis has hau a uiiect impact on the
peifoimance anu wealth position of agiibusiness fiims, similai to othei types of
inuustiial fiims. Risks ielateu to the global economic iecessions as well as
paiticulai inuustiy iisks have impacts on agiibusiness fiims in teims of
ueteiioiating in theii equity positions. Theiefoie, vaiious iisk management anu
alteinative uiffeient business management stiategies have been implementeu to
maintain equity giowth iates. These stiategies can be gioupeu into asset
management, financial management, anu ievenue management stiategies
conuucteu by agiibusiness fiims anu have been shown to affect equity giowth of
faim businesses (Escalante anu Baiiy, 2uu2). Fuitheimoie, iuentifying the effects of
uiffeient management stiategies on equity giowth has been shown to vaiy acioss
the uistiibution of equity giowth iate (Bennings anu Katchova, 2uu8). In paiticulai,
theii finuings show that the vaiious management stiategies have uiffeient effects on
the equity giowth foi low- anu high-giowth faim businesses. Both of these stuuies
weie conuucteu foi faim businesses, with no similai stuuies being conuucteu foi
agiibusiness fiims.
The 2uu8 financial ciisis pioviueu a unique oppoitunity to examine the
ability of manageiial uecisions to compensate foi shocks to the system. While othei
financial ciisis have iemaineu uomestic oi have small impacts globally, the 2uu8
financial ciisis pioviueu woiluwiue implications. In the stuuy of multinational
businesses, this ieflects a uistinct oppoitunity to iuentify factois contiibuting to
stiategic position. By examining the management stiategies that playeu a

28

pieuominate iole in elevating an agiibusiness to a high peifoiming position uuiing
the economic iecession we can uelibeiate on coping stiategies foi economic
iecession. 0ui evaluation will yielu concluuing iemaiks on the implementation of
policy to safeguaiu against economic uowntuin.
Existing ieseaich into the impact of the financial ciisis on inuustiial fiims has
taken uiffeient appioaches to examine the influence of a constiaineu economy on
financial peifoimance. At least two known stuuies evaluateu management piactices
anu peiception of the financial ciisis thiough a suivey of Chief Executive 0fficeis
(Campello et al.). Eikens, Bung anu Natos (2uu9) have useu Compustat uata to
examine the impact of the financial ciisis in coipoiate goveinance policy. uiinuei et
al (198S) investigateu the impact of the faim financial ciisis on agiibusiness fiims.
While veiy little woik has been uone on the impact of the 2uu8 financial ciisis foi
agiibusinesses, these stuuies among otheis pioviue backgiounu infoimation on
coipoiate iesponse.
This poition of oui analysis focuses exclusively in agiibusiness fiims,
biiuging a knowleuge gap to pioviue an intiospective look on foou-sectoi
peifoimance uuiing an economic ciisis. 0ui analysis utilizing fiim-level uata
obtaineu thiough Compustat is unique in the examination appioach; a quantile
iegiession segments unuei- anu ovei-peifoimeis in the agiibusiness inuustiy. This
appioach allows the examination of management factois that aie common to ovei
peifoiming fiims within the agiibusiness sectoi.
The objective of this stuuy is to pinpoint effects of coipoiate financial
management stiategies, commonly ieseaicheu in liteiatuie, on the agiibusiness

29

fiims' peifoimance. In auuition, we seek to unueistanu how these effects uiffei foi
low- anu high-peifoiming agiibusiness fiims, piimaiy in the piesence of a the global
economic ciisis. The stuuy contiibutes to the existing liteiatuie by examining the
impacts of economic anu financial ciises in an inuustiy with consiueiable
heteiogeneity.
We use a quantile iegiession analysis to stuuy the effect of the business
management stiategies along the uistiibution of equity giowth positions. This
appioach allows foi the evaluation of how uiffeient stiategies affect the equity
giowth of agiibusiness fiims with iespect to theii position in the equity uistiibution,
assuming that heteiogeneity exists compaieu to the 0LS iegiession estimation. The
intei-quantile estimation is useu to fuithei confiim that estimateu paiameteis fiom
the quantile iegiession aie significantly uiffeient fiom one quantile to the next.
A quantile iegiession compaies the influence of vaiious factois on meuian
iegiession within each quantile. We finu uistinguishing uiffeiences between factois
in each quantile. As a iesult we can uiaw pieliminaiy conclusions iegaiuing impact
of uiffeient management stiategies on ietuin on equity anu ietuin on assets.
S.1 Econometiic Nouel-Quantile Regiession

0ui stuuy uses two estimation mouels: oiuinaiy least squaies iegiession
(0LS) anu quantile iegiession. Koenkei anu Bassett (1978) intiouuceu quantile
iegiession, wheie the conuitional quantiles aie expiesseu as a function of
explanatoiy vaiiables. The quantile iegiession opens the possibility foi us to
examine the impact of uiffeient vaiiables baseu on theii piofitability position. The
uistiibution of fiims within the quantile iegiession is the conuitional iesult of theii

Su

piofitability peifoimance. Low-peifoiming fiims fall into the left tail of the
uistiibution while theii high-peifoiming peeis move into the iight tail. The natuie
of this conuitional uistiibution can be useu to quantify the effects management
stiategies, maiket position anu the impact of the 2uu8 Financial Ciisis on
piofitability foi low- meuium- anu high-peifoiming fiims.
An 0LS iegiession utilizes a iegiession at the mean to explain the impact of
explanatoiy vaiiables on the uepenuent vaiiable. Compaiatively the quantile
iegiession consiueis iegiessions at meuian, 2Sth anu 7Sth points to illustiate the
ielationship of oui explanatoiy vaiiable on oui uepenuent vaiiable. The piesence of
homoskeuasticity in oui mouel will iesult in continuity between the paiametei
estimates of oui 0LS anu quantile iegiession mouel will be similai tol each othei at
coiiesponuing points of uistiibution. 0n the othei hanu, a heteioskeuasticity
conuition cieates a situation wheie the paiametei estimates fiom oui quantile
iegiession significantly uiffei fiom the 0LS iegiession anu the quantile iegiessions
at uiffeient points. Consequently, the quantile iegiessions will allow us to examine
the maiginal uiffeiences of the uepenuent vaiiable in teims of the change in the
explanatoiy vaiiables at points above anu below the inuustiy meuian. Noieovei,
while the quantile estimatois have compaiable efficiency to least squaies estimatois
foi noimally uistiibuteu eiiois, they may be moie efficient than the least squaies
estimatois foi non-noimal eiioi uistiibutions (Koenkei anu Bassett, 1978).
Koenkei anu Bassett (1978) uesciibe a quantile iegiession mouel as follows:
(1)
i i i
y x e
u u
| ' = +

S1

wheie yi uenotes the ietuin on equity foi fiim i , xi is a vectoi of explanatoiy
vaiiables, is an unknown vectoi of iegiession paiameteis associateu with the
th quantile (u<<1uu) of the conuitional uistiibution of yi , anu ei, is an unknown
eiioi teim. The conuitional quantile function can be expiesseu as
(S) .
Thus, the quantile iegiession estimatoi is the solution to the following
minimization pioblem:
(4)
The coefficient can be inteipieteu as the maiginal change in the fiim ietuin on
equity fiom a maiginal change in the xi stiategy vaiiable conuitional on being in the
th quantile. 0ui stuuy utilizeu thiee quantile iegiessions at 2Sth, Suth anu 7Sth
quantiles. We utilize the STATA coues ieg anu qieg to peifoim oui 0LS anu quantile
estimates iespectively.
S.2 vaiiable Selection anu Besciiption

Nultiple financial measuies auequately uemonstiate piofitability of a fiim
ovei a specific financial peiiou. 0tilizing ietuin on equity (R0E) allows us to
examine the ietuin to investment ovei a specific time fiame; this is paiticulaily well
suiteu to the natuie of the financial ciisis issue. Compaieu two othei financial ciisis
peiious in oui uataset, the 2uu8 financial ciisis was chaiacteiizeu by the limitation
of funuing uistiibuteu by banks. 0ui iesults will ueteimine if outsiue factois othei
( )
i i i
Q y x x
u u
| ' =
u
|
(1 )
i i i i
i i i i
y x y x
Min y x y x
u
u u
u u
|
| |
u | u |
' ' > <

' ' +
`

)

u
|

S2

than the availability to funus, paiticulaily equity, negatively influenceu company
peifoimance uuiing this time.
Compaieu to othei measuies of financial giowth, the ietuin on equity iatio
piesents with seveial auvantages anu uisauvantages. Retuin on equity iepiesents a
goou inuicatoi of the intangible chaiacteiistics of company quality anu is
inuepenuent of public peiception of the company. 0thei measuies of company
success, incluuing stock piices, iemain moie of an influence of public peiception
than one of actual company giowth. Auuitionally ietuin on equity giants us the
ability to measuie the efficiency of the company within limiteu iesouices.
Companies with highei ietuin to equity uemonstiate gieatei efficiency with
available iesouices leauing to gieatei financial peifoimance foi these companies
uuiing the economic uowntuin.
Financial liteiatuie anu oui oveiview of the histoiical peifoimance of
agiibusinesses aigue foi the inclusion of ietuin on assets (R0A) as a measuie of
fiim peifoimance. We incluue this as a sepaiate inuepenuent vaiiable, anu will also
stiive to explain the impact of financial ciisis on this financial peifoimance iatio.
Foi the puiposes of the papei we'll be using the C0NP0STAT Coues NIQ (Net
Income-Quaiteily) anu CEuQ (Common0iuinaiy Equity Quaiteily Bata) to
calculate ietuin on equity. To calculate ietuin on assets C0NP0STAT Coues NIQ
(Net Income-Quaiteily) anu ATQ (Assets-Total Quaiteily Bata) aie utilizeu.
As pievious iuentifieu in Chaptei 0ne, the financial ciisis of 2uu8 hau the
uefineu chaiacteiistic of global impact. Feueial Reseive uefines the financial ciisis
of 2uu8 in teims of bank lenuing anu the atmospheie of takeoveis; the financial

SS

limitations of this time hau a piofounu impact on the financial peifoimance of majoi
companies.
Commonly iegaiueu as the most significant yeai of the financial ciisis, 2uu8
is chaiacteiistically measuieu by inuicatois of economic stiength. In 2uu8, 0.S.
householus suffeieu the woist one-yeai uecline in householu net woith ielative to
income in a centuiy of iecoiukeepinganu amount equal to about a yeai of nominal
uBP in that yeai (Reinhait 2u11). The National Buieau of Economic Reseaich
(NBER) iuentifies 2uu8 as a iecession business cycle that lasteu foi 18 months
staiting in Becembei 2uu7 anu continuing thiough }une 2uu9. The financial ciisis
vaiiable we utilize in oui analysis ieflects the NBER iuentification of peiiou of
economic ciisis suiiounuing the 2uu8 Financial Ciisis. Auuitionally we have
excluueu othei peiious of financial uecline occuiiing since beginning of oui uata
sample in 196u. Pieliminaiy stuuies uemonstiateu no significance in oui mouel foi
the peiious of economic uecline outsiue of the 2uu8 financial ciisis, substantiating
oui theoiy that it takes a global event to impact multinational fiims.
The uata piesenteu is this stuuy utilizes sales as a measuie of fiim size, which
is consistent with the majoiity of financial liteiatuie, even though some stuuies
contiauict this measuie. Pagano anu Schivaiui (2uuS) offei that measuiing size by
employment seems piefeiable to an inuicatoi such as sales, which ciitically uepenus
on the intensity of inteimeuiate inputs. Fiom oui oveiview of histoiical
agiibusiness peifoimance that sales foi agiibusinesses aie a uefining factoi of
agiibusinesses; it iemains impoitant to gauge how this continues to impact
agiibusinesses is situations of financial ciisis.

S4

0ui othei vaiiables incluue a Naiket value Ratio, liquiuity measuies (Cash)
anu long-teim leveiage (Bebt-to-Assets). By incluuing a maiket value iatio we can
see if the maiket valuation playeu a iole in oui iegiession. Foi the puiposes of oui
stuuy we useu piice to eainings iatio to uefine oui maiket value. The Bebt-to-Asset
Ratio iepiesents the piopoition of a companies assets being financeu thiough uebt.
The 2uu8 Financial Ciisis is chaiacteiizeu by fluctuations in financial sectoi anu
coipoiate financing became an issue uuiing this peiiou. Even though some of these
inuicatois aie somewhat ielateu a simple coiielation matiix justifieu theii inclusion.
The inclusion of the Altman Z-scoie seives, as an inuicatoi of inteinal
financial health allow us to gauge the impact of inuicatois that faileu to have
significance inuiviuual but have a combineu impact on agiibusiness financial
peifoimance. In oui coiielation tests the Altman Z-Scoie faileu to show a high
coiielation scoie to justify its exclusion fiom oui analysis.
TABLE S.1 vaiiable Besciiptions
vaiiable
Name
vaiiable Besciiption Nean SB
R0E Bepenuent vaiiable; Net Income
(NIQ)Equity(CEQQ)
u.262488 6.S6
R0A Bepenuent vaiiable; Net Income (NIQ)Total
Assets (ATQ)
-u.u787S 4.S1
Recession Bummy vaiiable; 4
th
Quaitei 2uu7-2
nu
Quaitei
2uu9
u.uS718S u.18
Altman Z-
Scoie
Calculateu using Altman's Inuustiy Foimula u.S7S618 2.79
Bebt-to-
Assets
Liabilities (LTQ) Total Assets (ATQ) 1.478779 S7.u1
Sales Quaiteily Sales (SALESQ) 4.1S8779 2.S6
Naiket value
Ratio
Piice at Closing (PRCCQ) Retaineu Eainings
(REQ)
u.4uS6u6 Su.u4
Cash CASB (CBQ) 284.7477 9S4.4S

SS

S.S Quantile Regiession Results
0ui test foi heteioskeuasticity faileu to show eviuence to keep the null
hypothesis of constant vaiiance. This is consistent with the uiffeiing coefficient
estimates iesults among oui quantiles. Both of these inuicatois suggest that a
benefit exists to utilizing quantile iegiession to examine the impact of oui
inuepenuent vaiiables on oui uepenuent vaiiables ietuin on equity anu ietuin on
assets. Initially, oui iesults with a small annual uataset accepteu the null
hypothesis; this pioblem was iesolveu with a moie uynamic laigei uataset that
incluueu quaiteily obseivations anu moie an expanueu time fiame.
Foi oui mouel explaining ietuin on equity anu oui mouel explaining ietuin
on assets we finu that iecession is only significant foi the low-peifoiming fiims.
0thei inuepenuent vaiiables yielu similai iesults in both of oui mouels. The Z-scoie
vaiiable has positive significance to top peifoimeis anu companies at the meuian,
consistent to the natuie of this scoie. We woulu expect the factois compileu in this
measuie to yielu benefit to top peifoimeis.
The uebt-to-asset iatio was significant acioss all levels of fiim peifoimance, a
consistent effect with oui pievious ieseaich with a smallei uataset. This
inuepenuent vaiiable has uiffeient impacts at peifoimance level, with top
peifoimeis ieceiving a positive impact foi a highei uebt-to-asset iatio.
Naiket-value iatio continues the tienu of consistent impacts acioss both
mouels. We finu that Naiket-value is significant to all level of peifoimance with a
laigei impact to high peifoiming fiims.

S6

Sales have a significant impact low-peifoimeis; an inciease in sales boosts
the financial peifoimance of the fiim. Fiom oui look at histoiical peifoimance of
agiibusinesses, we have uiscoveieu that this sectoi of the economy has highei sales
giowth than the maiket. Auuitional ieseaich woulu claiify if this is an inuustiy
iesult oi consistent acioss the maiket.
0ne vaiiable uiffeieu in impact acioss oui mouels. Cash was only significant
to high peifoimeis in oui mouel examining the impacts to ietuin on assets. The
same vaiiable in the mouel examining ietuin on equity yielueu a significant positive
impact to all levels of peifoimance with a gieatei magnituue of impact on high
peifoimeis. Incluuing othei liquiuity measuies, such as at the quick iatio oi cuiient
iatio, coulu possibly pioviue moie accuiate iesults. Fiequently, iatios aie
inteiielateu anu such ielationship iequiie auuitional ieseaich to ueciue the best
ioute foi fuithei ieseaich.
A visual iepiesentation of a quantile iegiession shows the uiffeiing impact of
inuepenuent vaiiable in the two mouels measuiing fiim peifoimance. FIu0RE S.1
anu FIu0RE S.2 illustiate the vaiying impacts.
In piesenting these iesults, we acknowleuge that long time-seiies piesent
oppoitunities foi auto-coiielation. 0ui coiielation matiix uemonstiateu
satisfactoiy scoies acioss oui vaiiable, yet this issue still waiiants fuithei ieseaich.
As we conuuct stuuies in the futuie to test foi stiuctuial bieaks, the infoimation that
we have piesenteu heie will pioviue a baseline fiom which we can impiove oui
analysis; uistinguishing between impoitant factois that impact agiibusinesses long-
teim anu ovei cycles in the economy.

S7

TABLE S.2 R0A 0LS Regiession Results
R0A Coefficient Stu. Eii. t P>|t|
9S% Confiuence
Inteival
Recession .uu92S19 .u11S84 u.8u u.42S -.u1S46S .uS19687
Z-Scoie -.u88184S .u1S197S -S.8u u.uuu -.117987 -.uS8S816
Bebt-to-Assets -.u726847 .uu111u9 -6S.4S u.uuu -.u7486S2 -.u7uSu62
Sales .u24u8S9 .uu2Su1 1u.47 u.uuu .u19S7SS .u28S984
Naiket value .uuu1uSS .uuuS74 u.28 u.778 -.uuu6281 .uuu8S87
Cash -.uuuu16 6.28e-u6 -2.S4 u.u11 -.u811u79 -S.66e-u6

TABLE S.S R0A Quantile Regiession .2S Results
R0A Coefficient Stu. Eii. T P>|t|
9S% Confiuence
Inteival
Recession -.uuS6S4S .uu18u7 -2.u1 u.u44 -.uu71782 -.uuuu9u8
Z-Scoie .uu76846 .uu22u78 S.48 u.uu1 .uuSSSS1 .u12u142
Bebt-To-Assets -.u8u7u9S .uuu1SS8 -S18.1S u.uuu -.u81u149 -.u8u4u4
Sales .uu7944S .uuu4uu1 19.8S u.uuu .uu71S98 .uu87292
Naiket value .uuuu8u1 .uuuu276 2.9u u.uu4 .uuuu26 .uuu1S4S
Cash 8.SSe-u8 6.91e-u7 u.12 u.9u2 -1.27e-u6 1.44e-u6
_cons -.uu7u414 .uu19uS -S.7u u.uuu -u.u177SS -.uuSSu9S

TABLE S.4 R0A Quantile Regiession .Su Results
9S% Confiuence
Inteival
Recession -.uu1Su14 .uu12u44 -1.2S u.21S -.uuS86S2 .uuu86uS
Z-Scoie .u129119 .uu1S44u 8.S6 u.uuu .uu9882S .u1S941S
Bebt-to-Assets -.uS6u92S .uuuu986 -S68.7S u.uuu -.uS628S7 -.uSS8989
Sales .uu41419 .uuu2S92 17.S1 u.uuu .uuS6728 .uu4611
Naiket value .uuu14SS .uuuu1S6 1u.S4 u.uuu .uuu1166 .uuu1699
Cash 6.87e-u7 6.47e-u7 1.u6 u.289 -S.82e-u7 1.96e-u6
_cons .u1S2177 .uu1172S 12.98 u.uuu .u12918S .u17S171

TABLE S.S R0A Quantile Regiession .7S Results
9S% Confiuence
Inteival
Recession -.uu2127S .uu1S976 -1.SS u.18S -.uuS26u6 .uu1uuSS
Z-Scoie .u19u786 .uu21S77 8.84 u.uuu .u14847S .u2SSu99
Bebt-to-Assets -.uS76u62 .uuu11uS -S4u.96 u.uuu -.uS7822S -.uS7S899
Sales .uu18uS6 .uuuSuu2 6.u1 u.uuu .uu12168 .uu2S94S
Naiket value .uuu1841 .uuuu1u8 16.97 u.uuu .uuu1628 .uuu2uS4
Cash 2.2Se-u6 7.uSe-u7 S.2u u.uu1 8.79e-u7 S.6Se-u6
_cons .u28SS96 .uu1SSSS 18.48 u.uuu .u2SSS2S .uS1S469

S8

TABLE S.6 R0E 0LS Regiession Results
R0E Coefficient Stu. Eii. T P>|t|
9S% Confiuence
Inteival
Recession .1S74SSS .u969SS7 1.62 u.1uS -.uS268 .S47S911
Z-Scoie .u976uS1 .127198 u.77 u.44S -.1S18S7S .S4Su476
Bebt-to-Assets .uu2uu81 .uu92979 u.22 u.829 -.u1622S6 .u2u2417
Sales -u.479SSS .u192S9S -2.49 u.u1S -.u8S72S8 -.u1u1868
Naiket value .uu12276 .uuS1Su1 u.S9 u.69S -.uu491u6 .uu7S6S9
Cash .uuuu641 .uuuuS26 1.22 u.22S -.uuuuS9 .uuu1672

TABLE S.7 R0E Quantile Regiession .2S Results
9S% Confiuence
Inteival
Recession -.uuS74 .uu267S4 -2.1S u.uS2 -.u1u9827 -.uuu497S
Z-Scoie .uu17812 .uuS718S u.48 u.6S2 -.uuSS11 .uu9u7SS
Bebt-to-Assets .uuu74 .uuu2898 2.SS u.u11 .uuu1717 .uu1Su8S
Sales .uu6284 .uuuS6S6 11.11 u.uuu .uuS1748 .uu7S9SS
Naiket value .uuu97uS .uuuuSuS 19.2u u.uuu .uuu8714 .uu1u696
Cash 2.7Se-u6 1.4Se-u6 1.91 u.uS6 -7.S9e-u8 S.S4e-u6
_cons -.u2S82u6 .uu278u7 -9.29 u.uuu -.uS127S7 -.u2uS674

TABLE S.8 R0E Quantile Regiession .Su Results
9S% Confiuence
Inteival
Recession -.uu29911 .uu18912 -1.S8 u.114 -.uu66998 .uuu7177
Z-Scoie .u1S19 .uu24781 6.1S u.uuu .u1uSSu4 .u2uu496
Bebt-to-Assets .uu217S9 .uuu18uS 12.uS u.uuu .uu1822 .uu2S299
Sales .uuSu86S .uuuS7S 8.2S u.uuu .uu2SS1 .uuS8219
Naiket value .uu1u279 .uuuu21S 48.2u u.uuu .uuu986 .uu1u697
Cash 4.SSe-u6 1.u1e-u6 4.Su u.uuu 2.SSe-u6 6.Sue-u6
_cons .uu74uS2 .uu18S42 S.99 u.uuu .uuS769 .u11u414

TABLE S.9 R0E Quantile Regiession .7S Results
9S% Confiuence
Inteival
Recession -.uu26167 .uuS6u68 -u.7S u.468 -.uu96899 .uu44S64
Z-Scoie .uSu2uS .uuS41SS S.S8 u.uuu .u19S871 .u4u8189
Bebt-to-assets .uu78S26 .uuu297S 26.SS u.uuu .uu72492 .uu841S9
Sales -.uuu1Su9 .uuu7911 -u.19 u.849 -.uu19u24 .uu14uuS
Naiket value .uu1u9u8 .uuuu246 44.S6 u.uuu .uu1u42S .uu11S9
Cash 8.S6e-u6 1.SSe-u6 S.6u u.uuu S.S6e-u6 .uuuu116
_cons .u42SS7 .uuS8u1S 11.19 u.uuu .uSSu824 .u499916

S
9

FIGURE 5.1 ROA Quantile Regression

4
u

FIGURE 5.2 ROE Quantile Regression

41

S.4 Concluuing iemaiks on agiibusiness peifoimance in conuitions of systematic
shock

The infoimation gatheieu fiom oui stuuy is paiticulaily useful in the
foimation of coipoiate policy, paiticulaily foi safeguaiuing against the financial
iecession. This stuuy also examines the effect of economic iecession on agiibusiness
fiims. The iesults show that iecessions have a negative impact on agiibusiness
fiims' equity giowth iates anu ietuin on assets, as expecteu. Because of
consiueiable heteiogeneity in fiim peifoimance, the effects of the global iecession
aie shown to affect low-giowth fiims uiffeiently fiom high-giowth fiims. The
magnituue of the coefficients aie lowei in absolute values foi highei R0E fiims,
which means that low-peifoiming agiibusiness fiims have been moie negatively
affecteu by the economic ciisis.
The finuings of this stuuy suggest that management stiategies, which incluue
asset management, financial management anu ievenue management, have an
influence on the equity giowth of agiibusiness fiims. Fuitheimoie, these stiategies
jointly help to explain the inciease anu ueciease in equity giowth positions foi
agiibusiness fiims. Financial iatios ieflecting these stiategies aie: uebt-to-asset
iatio anu piice-to-eainings iatio.
The finuings fiom this stuuy have impoitant implications foi impioving the
financial position anu equity giowth iates of agiibusiness fiims. We show
consiueiable heteiogeneity in fiim peifoimance (as shown by the use of quantile
iegiession methous). Theiefoie asset, ievenue, anu financial management
stiategies intenuing to impiove the financial position of agiibusiness fiims woulu
affect them uiffeiently as shown by oui iesults. In auuition, the global economic

42

iecession is shown to affect all types of fiims but have a laigei effect on low-
peifoiming as opposeu to high-peifoiming agiibusiness fiims. These iesults aie
useful foi agiibusiness fiims seeking to impiove theii peifoimance, as we show
which management stiategies (uiveisification, capital expenuituies, fiim size) aie
associateu with inciease in equity giowth iates baseu on the peifoimance iecoiu of
the agiibusiness.

4S

!"#$%&' <0I* DI#C0)0)8 %"& 0)%&')#; "&#;%" ,B #8'09.:0)&:: B0'C:H

The longevity anu stiength of a publically tiaueu agiibusiness uepenus on a
numbei of intei-ielateu factois. Aftei looking at chaiacteiistics of Agiibusiness
peifoimance compaieu to the maiket anu the impact of systematic shock on
agiibusiness fiims, we can look at the inteinal factois that signal fiim financial
uistiess. A look at agiibusiness fiims compaieu to the entiie maiket sample
acknowleuges that agiibusiness have histoiically exhibiteu less financial uistiess
than non-agiibusiness fiims, yet oui finuing show that manageiial factois impact
both set of fiims in similai ways.
The Nouigliani-Nillei theoiem offeis unuei efficient maiket conuitions a
fiim's value is unaffecteu by how the fiim is financeu (Nouigliani anu Nillei 19S8).
Conuitions of financial uistiess altei the ielationship between financial conuitions
anu fiim peifoimance. Fiims see a state of financial uistiess as a costly position to
maintain. A fiim in this position faces limiteu access to cieuit anu ueteiioiateu
ielationships with stakeholueis; this iesults in ueiivations fiom the fiim optimal
capital stiuctuie. 0ltimately this places the fiim in a position wheie peiceiveu
financial uistiess can inuuce an aggiessive iesponse by competitois seizing the
oppoitunity to gain maiket shaie, inuicating a competitoi uiive loss in maiket
shaie. Fiims in financial uistiess also face maiket thieats fiom customei-uiiven
losses anu managei-uiiven ieuuctions.
0thei stuuies have examineu how capital stiuctuie impacts agiibusiness
fiims (Spoileuei anu Noss 2uu1). These stuuies focus on equity vs. uebt
uistiibution anu intiouuce the topic of capital stiuctuie within agiibusinesses. The

44

fiim's iesponse to these costs uiffeis with anticipateu situation of financial uistiess
anu the event of an unanticipateu conuition of financial uistiess; each case has an
impact on fiim peifoimance. Pievious stuuies have shown that existing maiket
uistiess has a uiffeiing impact on fiim peifoimance (Enlow anu Katchova 2u11).
Compaiatively, the infoimation piesenteu in this new stuuy contiibutes to the
existing liteiatuie thiough the analysis of the factois associateu with financial
uistiess in inuiviuual agiibusiness fiims.
Initially, we uesigneu this stuuy to look at the impact of vaiious management
anu consumei-uiiven factois on financial peifoimance; applying a methouology
suggesteu in 1994 stuuy by 0plei anu Titman that lookeu at uepiesseu inuustiies.
This stuuy uemonstiates that a positive ielationship exists between financial
conuition of a fiim anu fiim peifoimance in inuentifying conuitions of an inuustiy
uowntuin. Buiing these uowntuins, moie highly leveiageu fiims tenu to lose
maiket shaie anu expeiience lowei opeiating piofits than theii competitois (0plei
anu Titman 1994). 0ui hypothesis suggesteu that by examining the impact of
coipoiate uecision-making, we can look into some methous that ieuuce the impact
of a financial uecline unuei uistiesseu conuitions. It appeais that financial uistiess
can simultaneously cause substantial anu costly losses of business while piomoting
neeueu changes in opeiation (0plei anu Titman 1994).
0ui initial mouel ian thiee 0LS Regiessions that with the same inuepenuent
vaiiable piesenteu in oui stuuy anu featuiing stock ietuins, opeiating income anu
sales giowth as uepenuent vaiiables. These thiee measuies of financial
peifoimance outlineu by 0plei anu Titman, showeu that Z-scoies, Sales, anu cieuit

4S

iatings hau uiffeient impacts on financial peifoimance but with little significant in
the 0LS iegiessions. 0plei anu Titman's stuuy hau the auvantage of examining a
laige beith of fiims, inuentifying uepiesseu inuustiies anu then utilizing those
samples to examine the impact of ceitain factois within those inuustiies. Since we
want to focus exclusively on Agiibusiness fiims with this stuuy, 0plei anu Titman
mouel hau seveial inteiesting featuies that weie un-implementable. In paiticulai
the methouology they piesenteu hau the auvantage of selecting uistiesseu
inuustiies anu compaiing those to uistiesseu fiims in non-uistiess inuustiies. uiven
that we want to look at financial uistiess specifically within agiibusinesses oui
stuuy lack the auvantage of a uistiess inuustiy vaiiable.
0thei stuuies show that the inuepenuent vaiiables that we coulu incoipoiate
fiom the 0plei anu Titman stuuy woikeu well in a binaiy mouel. At least one stuuy
measuieu the ability of these inuepenuent vaiiables to pieuict financial uistiess anu
peifoimance of uistiesseu stocks with the logit mouel (Campbell et al. 2u1u).
0theis have sought to auvance the state of ait in financial uistiess moueling by
explicating the theoietical anu empiiical value of the mixeu logit mouel (}ones anu
Benshei 2uu4). Kahya anu Theouossiou (1999) utilize a moie uynamic C0S0N
methouology to pieuict coipoiate financial uistiess. Lecleie (1999) states that
ieseaicheis in financial accounting often use qualitative iesponse mouel in choice-
baseu empiiical ieseaich, incluuing that most of the ieseaich ielies on the familiai
techniques of uichotomous piobit oi logistic iegiession.
0ui mouel utilizeu the infoimation that we unueistanu fiom oui 0LS
iegiessions baseu off of 0plei anu Titman's stuuy anu incoipoiates the factois into a

46

methouology wiuely accepteu in financial ieseaich anu unueiexploieu within the
agiibusiness inuustiy. Thus we can take the significant infoimation fiom oui initial
iegiessions anu utilize these management factois in oui piobit mouel, measuiing
the likelihoou of the impact that each of these factois hau upon agiibusiness
financial uistiess.
6.1 Econometiic NouelPiobit
This chaptei focuses exclusively fiim financial uistiess anu stiives to pioviue
in intiospective look on the peifoimance of a sectoi of the economy. 0ui analysis
utilizing fiim-level uata obtaineu thiough Compustat facilitates the examination of
the factois that leau to pooi S & P peifoimance in touay's maiket. This appioach
allows the examination of management factois anu consumei-uiiven common in
business fiims. Poitei (1991) iuentifies these factois as two categoiies of activities
ielateu to fiim stiategy.
0ui stuuy looks at the impact of inuepenuent management uecisions on
achieving a highei Stanuaiu anu Pooi Rating. Stanuaiu anu Pooi iatings occui in
eight categoiies ianging fiom A+ to B; an oiueieu piobit mouel woulu have alloweu
us to examine the contiibution of the iuentifieu management factois on inuiviuual
iatings. Bowevei foi the puiposes of this stuuy, we aie conceineu about the ability
of management factois to signal financial uistiess. To cieate a measuie of uistiess
vs. non-uistiesseu fiims we gioupeu the high-scoies A+, A, A-, B+, B, B- togethei to
inuicate a goou S & P iating. To inuicate a uistiesseu scoie we gioupeu S & P
iatings C, B, anu LIQ togethei; these scoies iepiesent the lowest acceptable scoie
(C) anu the 'In ieoiganization' scoie (B) as well as the 'Liquiuation' scoie (LIQ). In

47

examining pooi financial peifoimance foi futuie ieseaich, incluuing the lowei B
scoies woulu uiffeientiate between below aveiage anu above aveiage peifoimance.
Bowevei, foi this set up mouels touay we'ie exclusively conceineu with the iuea of
uistiess, which is bettei uemonstiateu by S & P iatings below C.
Fiom this pioceuuie we then have a binaiy inuepenuent uummy vaiiable
that's suiteu foi a piobit mouel. Logit anu piobit aie the most wiuely useu methous
foi estimating the ielationship between choices binaiy choices anu the attiibutes of
alteinatives oi two alteinative situations (Bausman anu Wise 1978). The piobit
mouel takes the foim:

Wheie the uepenuent vaiiable Y iepiesents a uistiesses agiibusiness fiim inuicateu
by S &P Ratings. Foi the iight hanu siue of the equation u iepiesents the
cumulative uistiibution function of a stanuaiu noimal uistiibution anu | is
estimateu by the maximum likelihoou estimation. The inuepenuent vaiiables X
iepiesent oui iuentifieu management uecisions.
6.2 vaiiable Selection anu Besciiption

0ui stuuy focuses on foui inuepenuent vaiiables that weie founu to be
significant in financial liteiatuie. These foui vaiiables incluue loggeu sales, a
piofitability measuie, cash, anu Z-scoie. Sales iepiesent a valuable vaiiable as a
measuie of fiim size anu allow consumei confiuence in the fiim. 0ui piofitability
measuie is incluueu as the iatio foi ietuin on assets; we have founu this a uynamic
measuie of piofitability that gives us insight into the fiim. We incluue the Z-scoie
as an establisheu measuie to pieuict the likelihoou of fiim financial uistiess; this
Pr Y =1| X
( )
= u(X' |)

48

scoie iepiesents a blenueu measuie of seveial financial iatios anu has been wiuely
accepteu as a measuie of pieuicting financial uistiess in othei stuuies.
The S & P iatings within the uataset weie noimally uistiibuteu with moie
than sixty peicent of the fiims uemonstiating the meuian S&P B-iating. Baseu on S
&P Scoies, notable uiffeiences between exist between agiibusinesses anu the
maiket. This will be uiscusseu moie in the conclusions of the stuuy as a consistency
with oui anticipateu hypothesis that agiibusinesses exhibit stiong financial
peifoimance. 0ui inuepenuent vaiiables weie consistent with financial liteiatuie
anu have been utilizeu in faim anu fiim agiibusiness analysis.
TABLE 6.1 S & P Rankings
S & P Ranking Fiequency Peicent
A 62S 7.14
A+ 1,182 1S.Su
A- 461 S.26
B 1,8S9 21.uu
B+ 1,28u 14.62
B- 1,629 18.6u
C 1,2u2 1S.72
B S4u 6.17
Total 8,7S8 1uu

Fiim sales iepiesent an impoitant measuie of fiim size. 0plei anu Titman
(1994) anu (Kahya anu Theouuossiou) have examineu the impact of fiim size on
financial uistiess. We incluue fiim sales in oui mouels as a loggeu vaiiable enabling
smoothing of yeais of extiaoiuinaiy sales giowth oi sales loss. 0nuei noimal
financial ciicumstances, it is common piactice foi financial economists utilizeu a
smootheu vaiiable. uiven that we have an acknowleugeu financial ciisis in oui

49

uataset as iuentifieu in chaptei S anu shown to impact agiibusiness fiims,
smoothing this vaiiable iemoves some of the systematic iisk inheient to the maiket.
We incluue the Altman Z scoie in this stuuy as it incoipoiates seveial factois
that faileu uemonstiate statistical significance inuiviuually in oui oiiginal 0LS
mouel. Bowevei, the Altman Z scoie shows statistical significance in at least one of
the 0LS iegiessions anu is a wiuely accepteu measuie of fiim uistiess. This inuex
scoies iesults in a combineu measuies of financial peifoimance wheie a high scoie
inuicateu stiong financial health anu a low scoie inuicateu pioximity to bankiuptcy.
Fiims in Altman's oiiginal sample whose Z scoies weie below the so-calleu "zone of
ignoiance" expeiienceu an aveiage uecline in the maiket value of theii common
stock of 4S pei cent fiom the time the mouel fiist pieuicteu bankiuptcy until the
actual failuie uate (Altman 1968).
Finuings inuicate that highly leveiageu fiims lose maiket shaie to theii less
leveiage competitois in inuustiy uowntuins (0plei anu Titman 1994). Chaptei five
iuentifies the uebt to asset iatio as impacting high-peifoiming fiims anu low-
peifoiming fiims in uiffeiing magnituues, with low-peifoiming fiims weatheiing a
moie haimful impact. The inclusion of a leveiage iatio as inuepenuent vaiiable in
this stuuy fuitheis pievious ieseaich anu allows us to examine the impact of the
leveiage on financial uistiess.
Campbell et. al (2u1u) focuses on the impact of low stock piices in pieuicting
financial uistiess. To examine the impact of low stock piices on financial
peifoimance anu uummy vaiiable is cieateu to inuicate a low stock piice. Stock
close piices below $Su aie maikeu anu inuicateu in the mouel. Realistically stock

Su

piices aie a measuie of consumei confiuence in the fiim. While stock piices
themselves might not be a goou inuicatoi of fiim financial peifoimance, uepiesseu
stock inuicate consumei peiception of the stock. Fiist intiouuceu by Poitei (1991),
consumei-uiiven factois ielateu to fiim stiategy play an impoitant iole in
pieuicting financial uistiess as uiscusseu by 0plei anu Titman (1994). 0thei
vaiiables coulu potentially inuicate consumei-confiuence in stock. The piice-to-
eainings iatio is often utilizeu to ueteimine if a stock is unueivalueu anu the
peicentage change in stock-value woulu pioviue a smootheu vaiiable to
accommouate maiket shocks. Auuitionally, with impioveu infoimation we coulu
examine the tiauing volume foi each company. Bowevei, theie is significant
conveisation in financial fielus about the concept of a comfoitable tiauing iange foi
consumei, with the theoiy that consumeis iueally like to puichase stocks
appioximately between $Su anu $8u. The inclusion of the uepiesseu piice vaiiable
allows us to exploie the value of existing conveisation within the financial fielu.
While the Altman-Z scoie incluues some measuies of piofitability, we also
incluue the iatio ietuin on assets as an inuepenuent measuie of piofitability. 0ui
coiielation matiix shows little coiielation between the vaiiables, even as we utilize
two measuie of piofitability in oui mouel. Theoietically, the moie piofitable a fiim
is the lowei the likelihoou of financial uistiess.
We incluue cash as a measuie of liquiuity. Too much cash may encouiage
manageis to take it easy, expanu theii peiks, oi empiie-builu with money that
shoulu be ietuineu to stockholueis (}ohnson anu Soenen 2uuS). 0thei measuies of

S1

liquiuity, incluuing measuies of fiee cash flow holu the potential to stiengthen oui
ieseaich anu offei othei oppoitunities foi fuithei exploiation.
TABLE 6.2 vaiiable Besciiptions
vaiiable Name Besciiption Nean St. Bev.
Bistiess S&P Scoie Bepenuent vaiiable u.1989uS9 u.S9
LogSales Inuepenuent vaiiable 4.1S8779u 2.S6
Piofitability Inuepenuent vaiiable -u.u716614 4.u6
Leveiage Scoie Inuepenuent vaiiable 1.419S97u 64.uS
Piice Inuepenuent vaiiable u.4212S69 u.49
Cash Inuepenuent vaiiable u.u827769 u.12
Altman Z-Scoie Inuepenuent vaiiable -u.uS81244 2.81

6.S Piobit Results
The iesults of oui mouel show that both manageiial anu consumei-uiiven
factois impact low S&P iatings. The chi-squaieu test foi oui mouel shows
appiopiiate iesults, suggesting that we ieject the null hypothesis anu that at least
one of oui iegiessois is not equal to zeio. 0ui iesults show that two of oui
inuepenuent vaiiables have a negative impact on the likelihoou that a fiim will have
a low scoie. The Altman-Z scoie has a negative coefficient, which is consistent with
the natuie of this scoie. We know that low Altman-Z scoies inuicate bankiuptcy,
while a highei scoie woulu inuicate less financial uistiess in the fiim. Financial
liteiatuie substantiates this finuing. Auuitionally, fiims with highei piofitability
have a lowei likelihoou of signaling financial uistiess thiu low S & P scoies. Since
piofitability, paiticulaily in teims maximization of ietuin on available iesouices,
iepiesents a stiong inuicatoi of financial health we expect this iesult.
Conveisely, we have thiee factois inciease the likelihoou of low S & P iating.
0ui low piice uummy vaiiable iesults in positive coefficient, suggesting that a low

S2

stock closing piice foi the quaitei incieases the likelihoou of a low S & P iating. A
low-piice vaiiable ielateu to the consumei confiuence in the fiim anu fiims with
lowei anticipateu confiuence shoulu iesult with lowei S&P scoies in oui mouel.
Suipiisingly, we finu that incieaseu cash on hanu incieases the likelihoou of a low S
& P iating. The implication of this will be uiscussion fuithei in oui stuuy
conclusions.
Suipiisingly, fiims with highei smootheu sales expeiience incieaseu
likelihoou of a low S & P scoie. This is inconsistent with oui hypothesis that
consumei-uiiven choices have a positive impact on fiim peifoimance suggests that
fiims with highei consumei confiuence, i.e. those with piouucts that consumeis
tiust anu want to buy, peifoim bettei than theii counteipaits. This iesult waiiants
fuithei ieseaich, as it iuns countei-intuitive to establisheu liteiatuie.
The final inuepenuent vaiiable in oui stuuy, the leveiage scoie vaiiable faileu
to show statistical significance. 0ui othei vaiiables showeu significance at the 1u%
level, with thiee vaiiables showing significance at the S% level.
TABLE 6.S Piobit Results
vaiiable
Naiginal
Effects Stu. Eii. z P>z |9S% Confiuence Inteivalj
LogSales* u.u71287S .uS68SS6 1.9S u.uSS -.uuu944S .14SS19
Piofitability** -6.2S2968 1.1298S2 -S.SS u.uuu -8.4674S7 -4.uS8499
Leveiage Scoie -.uu4uu19 .uu82S97 -u.49 u.627 -.u2u1S14 .u121477
Piice** 1.SSS424 .19SSS87 7.uu u.uuu .976uS6 1.7S4792
Cash* 1.62444S .91Su291 1.78 u.u76 -.1689814 S.417867
Z-Scoie** -SS.1S44 4.S642S6 -7.7u u.uuu -44.u8u14 -26.18866
VK()-2'10. .-%(-,-2'(20 '1 190 PSW 30:03
VVK()-2'10. .-%(-,-2'(20 '1 190 XW 30:03
G.80)" Y
M
Z =N[XM
JZ\\M

SS

6.4 Concluuing iemaiks on financial uistiess in Agiibusiness Fiims
Consumei-Biiven factois impact S & P scoies. 0ui initial fiamewoik the
uiscussion on financial uistiess focuseu on consumei anu managei uiiven impacts
on coipoiate peifoimance. We continue to see the consumei impact on signaling
financial uistiess with the piobit mouel piesenteu. Low consumei confiuence in the
company, expiesseu thiough the uepiesseu stock piice, incieaseu the likelihoou of
financial uistiess (Campbell et. Al). 0ui mouel suppoits the existing liteiatuie
ielateu to this ielationship as we finu that a uepiesseu stock piice inuicateu
incieaseu likelihoou of a low S & P scoie. The impact of the consumei-uiive factois
piesenteu heie again stiengthen the points Poitei (1991) iuentifies as aspects to
consiuei in ueveloping a uynamic business stiategy.
0ui mouel shows unanticipateu impacts fiom oui sales vaiiable. Existing
liteiatuie establishes that low sales can inuicate lowei consumei confiuence in a
company's ability to honoi piouuct peifoimance (0plei anu Titman 1994). Fuithei
exploiation into oui uataset coulu leau to bettei explanation of this iesult. 0tilizing
a loggeu-vaiiable foi sales iesulteu in seveial uioppeu obseivations. The majoiity of
uioppeu obseivations ieflecteu companies that hau iepoiteu financial infoimation
eveiy othei quaitei; this iesulteu in uioppeu obseivations moie likely to impact the
sales iesult than othei iesults. As we pioceeu with oui ieseaich on this subject,
we'll examine uiffeient ways to ueciease the numbei of uioppeu obseivations anu
to stiengthen the quality of this vaiiable. 0ui inconsistent iesult with this vaiiable
coulu also be a function of the maiket conuitions uuiing oui selecteu time iange;

S4

fuithei ieseaich is neeueu to exploie if this iesult is unique to agiibusinesses oi
affects fiims acioss the maiket as an impact of the 2uu8 financial ciisis.
0veiall, management factois impact S&P scoies in a manoi consistent with
financial liteiatuie. We woulu anticipate that highei piofitability of the fiim woulu
lowei the likelihoou of an S & P scoie that signals financial uistiess. Auuitionally,
oui stuuy has the same finuing as othei stuuies that substantiate the Altman Z-
scoie. With these similaiities to establisheu ieseaich, we can concluue that
agiibusinesses peifoim in a similai mannei to non-agiibusiness fiims in teims of
manageiial piactices impacting the likelihoou of financial uistiess.
Cash has an inteiesting impact on the incieaseu likelihoou of low S & P
scoies; oui anticipateu iesult foi this vaiiable woulu suggest fiims with laige
volumes of cash-on-hanu to uemonstiate lowei likelihoou of financial uistiess.
Bowevei, aftei examining the liteiatuie again with oui iesult in minu, we finu that
fiims signaling financial uistiess might be expecteu to keep laigei cash ieseives to
covei uebt.
This mouel uemonstiates the impact of management uecisions in pieuicting
financial uistiess as uefineu by the availability of infoimation on the Compustat
Batabase. While an auequate measuie of financial uistiess, the auuition of
bankiuptcy uata to this stuuy woulu allow a ueepei look into the impact of
manageiial factois anu customei uiiven losses that leau to financial failuie.
Auuitionally, the inclusion of othei inuepenuent vaiiables coulu illuminate othei
stiategies, such as manageiial tuinovei (uilson 1989), that alteinatively impact a
fiim's ability to weathei financial uistiess anu assume a position of competitive

SS

stiategy within the fiim. The inclusion of moie vaiiables outlineu in pievious
ieseaich (}ohnson anu Soenen 2uuS) woulu continue to stiengthen oui analysis of
inuicatois of successful anu financial stable agiibusinesses.
The contiibution of this stuuy to liteiatuie ielates to its singulai look at
agiibusiness fiims. Auuitional ieseaich into stiategy iegaiuing peifoimance of
agiibusiness fiims in conuitions of financial uistiess will benefit fiom the look at
'uiiveis' impact on uistiesseu fiim. Biiveis constitute the unueilying souices of
competitive auvantage, anu make competitive auvantage opeiational (Poitei 1991).

S6

!"#$%&' <&5&)* (5&'#;; !,)/;.:0,):H
Seveial inteiesting conclusions have been maue about agiibusiness financial
peifoimance thioughout this ieseaich. These conclusions contiibute to existing
ieseaich by examining the impact of common inuicatois of coipoiate success on
agiibusinesses.
Bistoiically, we founu that agiibusinesses outpeifoim oui maiket sample in
some unexpecteu ways. Agiibusinesses aie less likely to fall into financial uistiess
anu aie moie likely to outpeifoim the maiket in teims of aveiage maiket sales. 0ui
conclusions substantiate the theoiy that theie is consiueiable stiength in
agiibusiness peifoimance compaieu to a maiket sample.
Auuitionally, by looking at the stiategies that can compensate foi a financial
ciisis we weie able to iuentify management stiategies chaiacteiistic of high-
peifoiming fiims anu low-peifoiming fiims within the agiibusiness sectoi. These
management stiategies eluciuate some of the tools that agiibusinesses utilize to
compensate foi maiket-wiue shocks to oui economic anu financial maiketplace.
Baving examineu what influences agiibusiness maiket position, we then
lookeu at the inteinal health of agiibusiness fiims anu what maiket anu consumei-
uiiven factois impact likelihoou of financial uistiess. We've uiscoveieu that
agiibusinesses, while they outpeifoim the maiket, benefit fiom many of the same
manageiial uecisions implementeu by non-agiibusiness fiims anu consistently
examineu in financial liteiatuie.
Questions foi fuithei ieseaich have aiisen thioughout the piesenteu
analysis. Theie aie seveial points that coulu stiengthen oui examination of the

S7

financial peifoimance of agiibusinesses. Accessing bankiuptcy iates woulu allow us
to bettei measuie financial uistiess, anu pieuict inuicatois of company
peifoimance. Auuitionally, bettei uata woulu allow the inclusion of inuepenuent
vaiiables such as ieseaich anu uevelopment anu fiee cash flows. An examination of
auuitional vaiiables woulu stiengthen the iuentification of factois unique to
agiibusiness success. While oui piesenteu ieseaich contiibutes to liteiatuie by
iuentifying the impacts of common measuie of financial success on agiibusiness, it
uoes not iuentify measuies that sepaiate agiibusinesses fiom the iest of the maiket.
0veiall, the piesenteu analysis lays a soliu founuation foi futuie ieseaich.
We acknowleuge existing liteiatuie anu apply the techniques founu in this liteiatuie
exclusively to an agiibusiness sample to examine the coipoiate financial
peifoimance of agiibusinesses, theii histoiical peifoimance anu how they peifoim
unuei vaiious conuitions. 0ui contiibution to liteiatuie iepiesents a founuational
application of measuies of financial peifoimance to agiibusinesses, anu pioviues
the final conclusion that even though agiibusinesses follow expecteu outcomes
consistent with existing financial liteiatuie, auuitional ieseaich is neeueu to iuentify
the factois that sepaiate agiibusinesses fiom all-fiims in teims of coipoiate
peifoimance.

S8

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62

J+17

BATE 0F BIRTB: Novembei 27, 1987

PLACE 0F BIRTB: Elizabethtown, KY

EB0CATI0N:
BS Agiicultuial Economics, 0niveisity of Kentucky Nay 2u1u

BS Community & Leaueiship Bevelopment, 0niveisity of Kentucky Nay 2u1u

PR0FESSI0NAL EXPERIENCES
Reseaich Assistant, 0niveisity of Kentucky }anuaiy 2u11-Becembei 2u12

Agiicultuie Economist, 0SBA ERS Nay 2u12-Septembei 2u12

Fielu Biiectoi, Re-Elect Nayoi Newbeiiy 2u1u }une 2u1u-Novembei 2u1u

PRESENTATI0NS
"0tilizing uoveinment Bata in Nastei's Begiee Couisewoik." Luncheon
piesentation to 0niveisity of Kentucky Agiicultuial Economics Bepaitment.
Lexington, Kentucky 0ctobei 2u12.

"Chaiacteiistic of Coipoiate Agiibusiness Peifoimance." Piesenteu at the Ameiican
Agiicultuial Economic Association Neeting. Seattle, Washington August 2u12.

"Agiicultuie Nessaging foi Non-Agiicultuial Auuiences." Piesenteu to the Young
Bemociats of Ameiica Ruial Caucus Wintei Neeting. Naich 2u12.

"Cheiiy Blossoms in Kentucky." Auuiess to the Kentucky State Senate. Febiuaiy
2u12.

"KYFaimStait Statewiue Impacts." Piesenteu to the Kentucky Faim Buieau Young
Faimei Leaueiship Event. }anuaiy 2u12.

"The Impact of the Financial Ciisis on the Agiibusiness Fiims' Peifoimance."
Piesenteu at the Agiicultuie anu Applieu Economics Association NC-1177 Neeting.
0ctobei 2u11.

Sierra J. Enlow

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