Business Risk, Financial Risk, and Liquidity Management on U.S. Farms - Evidence From Selected States

Abstract

Risk management is pivotal to agribusiness decision-making, and researchers have developed various models to disentangle factors underlying farmers’ risk decisions. This thesis argues that an appropriate model should consider farmers’ leverage decisions altogether with liquidity decisions given that liquidity is another major constraint facing farm businesses. We incorporate current ratio into the classical risk balancing model. Our theoretical derivations generate two propositions: (1) an increase in business risk will cause current assets to increase, and (2) an increase in the expected return to assets will cause current assets to decrease. Using five income categories and three panel data models, regression results provide evidence supportive of the first proposition, but contradictory to the second proposition. We concluded that contradictory results for the second proposition may stem from a poor proxy variable for the expected return to assets. Besides, we tested the traditional risk balancing hypothesis and found evidence for risk balancing.