RETURNS TO DEBT AND EQUITY IN FARM PRODUCER ORGANIZATIONS

While the capital structure irrelevance proposition is the point of departure in corporate finance, it is unknown if debt-or-equity decisions matter to farm producer organizations. To inform decisions of capital acquisition, a panel study is conducted to estimate the relationships of different types of debt (current, long-term) and equity (allocated, unallocated) to the financial performance of 707 farm producer organizations in the United States during the 2005-2011 period. Using 3,120 observations, the panel analysis indicates net sales in period t is increased by $1.97, $9.59, and $4.01 with an addition of $1 in current debt, allocated equity, or unallocated equity in period t(-1). Furthermore, the magnitude of the positive relationship of an additional dollar of allocated (unallocated) equity to net income is estimated at $0.32 ($0.14). We thus reject the notion managers and directors of farm producer organizations should decide to use debt or equity with a coin toss.