| The U.S. agribusiness industry is undergoing transition to a more competitive environment where efficiency is becoming increasingly important. This research examines the relationship between investor returns, capital structure, and business risk. It is an attempt to address the issue of financial efficiency in the agribusiness industry and, while the issue is a large one, the study specifically deals with examining the effects of debt, liquidity, and business risk on investor returns.The hypothesis investigated is that publicly held agribusiness firm performance (i.e. investor rate of return as measured by stock price and dividend yield) is a function of capital structure and business risk. A sample of 50 U.S. agribusiness firms is selected and data collected on each firm for the years 1989 to 1998. Capital structure is measured by the firm's debt-to-asset ratio (capturing firm solvency), the debt structure index (capturing firm liquidity), and the coefficient of variation of operating income (capturing firm business risk).The analysis of the study was conducted in three phases: a regression utilizing the 10-year averages of each variable, a longitudinal study looking at the cross-sectional data over time, and a simultaneous equation approach, examining the simultaneous interaction among the variables included.The preponderance of the evidence indicates that capital structure is relevant to investor returns to agribusiness. As the firm's debt-to-asset ratio increases, investor returns first increase and then decrease at the point where the increased use of debt capital causes the cost of the firm's capital to increase due to the increased risk of default.Firm liquidity is shown to be negatively related to investor returns. The higher the liquidity of the firm (the more conservative its liquidity management strategy), the lower the returns to agribusiness investors.Business risk is indicated to be significant to investor returns in the mean regression. Also, the simultaneous equation approach suggests that business risk is directly relevant to liquidity and debt, which in turn directly impact investor returns. Business risk seems to interrelate with capital structure to affect investor returns. |
