AGRICULTURAL

ECONOMICS

Agricultural Economics 33 (2005) supplement 399–410

Financial structure, production, and productivity:

evidence from the U.S. food manufacturing industry
Ferdaus Hossaina , Ruchi Jainb , Ramu Govindasamyb,∗
a Risk, Information and Banking Group, American Express Phoenix, AZ
b Department of Agricultural, Food & Resource Economics, Rutgers University, 55 Dudley Road, New Brunswick, NJ 08901-8520, USA
Received 5 July 2002; received in revised form 19 February 2004; accepted 19 March 2004

Abstract
This study integrates production and financing to examine the impacts of financial structure change on the production, profitability, and
productivity growth in the U.S. food manufacturing industry. Empirical results show that during the period covered by this study, agency cost
associated with increased debt use by this industry negatively affected its output growth, input demand, profitability, and overall productivity
growth. Dividend payment positively contributed to the production and performance of this industry via signaling benefit. However, the negative
effects of increased debt use by this industry far outweighed the positive contribution of dividend payment. The U.S. food industry achieved a 0.9%
average annual productivity growth, which came primarily from technological progress and capital adjustment. The rapid increase in debt use by
this industry was responsible for slowing down the pace of productivity growth via its negative contribution to the total factor productivity growth.
Capital expansion was the principal driver of output growth and profitability in this industry.

JEL classification: D2, G3

Keywords: Food industry; Agency cost; Signaling benefit; Productivity growth

1. Introduction The U.S. food manufacturing sector has undergone impor-

The U.S. food manufacturing sector is one of the largest
sectors of the U.S. economy, accounting for about 14% of
the total manufacturing output (Morrison, 1997). In terms of
value added to the gross domestic product (GDP), it contributed
for US$177.7 billion in 1999, which was more than twice the
US$69.8 billion contribution of the farm sector to the GDP
(USDA, 2000). It provided employment for over 1.47 million
workers in 1998, which represented about 8% of all manufactur-
ing employment in the United States. (USDA, 2000). Further,
it is a major contributor to U.S. exports of food and agricultural
products. In fact, the value of manufactured food product ex-
ports has been consistently higher than that of bulk agricultural
commodities since 1991. For instance, the U.S. processed food
exports of US$24.4 billion in 1993 were almost 30% higher than
the US$18.8 billion exports of bulk agricultural commodities
(USDA, 1997).
∗ Corresponding author. Tel.: +1-732-932-9155 (Ext. 254); fax: +1-732-932-
8887.
E-mail address: govindasamy@aesop.rutgers.edu (R. Govindasamy).
tant structural changes in recent decades due to, among other
things, increased consolidation and concentration via merg-
ers and acquisitions (M&A), globalization, changes in relative
prices, shifts in consumer preferences, and changes in govern-
ment regulations (Adelaja et al., 1999; Morrison, 1997; Rogers,
2001). Although similar changes in other sectors have gener-
ated considerable activity among researchers who are interested
in understanding their causes and implications, the food manu-
facturing industry has received far less attention than either the
high-tech industries or the farm sector.
The causes and implications of various structural changes
in the U.S. food manufacturing sector have been explored
in a number of recent studies. Heien (1983) estimated the
Törnqvist–Theil multifactor productivity index for selected
food industries and found a very slow rate of productivity
growth in those industries. Buccola et al. (2000), however,
found evidence of a more robust growth in productivity, but
their analysis included only the milling and feed industries.
Goodwin and Brester (1995) analyzed the production structure
and input demand in the aggregate food manufacturing sector
and documented significant changes in production technology
with an increasing role of high-tech capital. Morrison (1997)
400
analyzed the impacts of capital investment (and asset fixity) on
cost structures and productivity in the aggregate food industry.
Morrison and Siegel (1998) found evidence of scale economies
resulting from R&D investments, high-tech capital, and human
capital in the U.S. food and fiber industries. Paul (1999a) ex-
amined the role of scale economy, mark-up behavior, trade, and
technology on the productivity of the aggregate food industry,
while Paul (1999b, 2001) explored the implications of industry
structure changes on the production and performance of the
meat sector.
The financial structure of the U.S. food industry has also un-
dergone significant changes in recent decades. Specifically, this
industry significantly increased its use of debt financing during
the last four decades. This is clearly evident from Fig. 1, which
shows the debt/asset ratio of the U.S. food industry (Standard
Industry Classification, SIC 20) as well as that of the overall
manufacturing sector for the 1960–1998 period. Figure 1 shows
that the debt/asset ratio of the U.S. food industry consistently
exceeded that of the overall manufacturing sector for the entire
1960–1998 period. After remaining stable around 25% during
1960–1964, the debt/asset ratio of the industry increased quite
rapidly and reached 39% in 1974. After falling to 34% by 1976
and remaining stable for several years, the ratio increased from
35% in 1984 to 56% in 1990. The ratio remained above 50%
throughout the 1990s. It may be noted that the sharp increases
in the debt/asset ratio during 1964–1974 and 1984–1990 al-
most mirror the periods when the pace of consolidation and
concentration in this industry experienced an increase.
The implications of the financial structure change on the pro-
duction and performance of the U.S. food industry have not
been explored in any of the previous research. In fact, all these
studies do not allow any linkage between financial variables
and decisions about real economic variables. This tradition of
analyzing firms’ decisions about real variables in isolation from
their financial decisions is based on the Modigliani–Miller re-
sult that a firm’s financial structure does not affect its market
60%
50%
40%
Debt/asset ratio
30%
20%
10%
0%
1960 1965 1970 1975 1980
Year
Food Manufacturing Industry
Source: Quarterly Financial Report: various issues.
Fig. 1. Debt/asset ratio in the U.S. food manufacturing industry: 1960–1998.
F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410
value or operating decisions about real variables (Modigliani
and Miller, 1958). However, the Modigliani–Miller result holds
only in a competitive and frictionless market setting. Recent
advances in information economics have demonstrated that in-
formation related problems (e.g., asymmetric information, lack
of contracting ability, search and transaction costs, etc.) may
lead to frictions in financial markets. In such an environment
the Modigliani–Miller result does not hold, and firms’ real and
financial decisions are interrelated. 1
Existence of asymmetric information can lead to adverse
selection and moral hazard that ultimately lead to agency cost
associated with debt financing. However, under existing tax
laws (i.e., tax deductibility of interest payments on debt), firms
enjoy tax savings from debt financing. Cost-minimizing firms
trade off the agency cost against the tax benefit to decide their
optimal debt levels. Firms use various signaling mechanisms
to overcome information related problems. Dividend payment
is one way a firm can signal the market about its expected
cash flows and overall financial health. Since dividend payment
is taxed under existing tax laws, firms trade off the signaling
benefit against the tax costs associated with dividend payment.
Recent literature in financial economics recognizes the link
between real and financial decisions of firms and proposes that
such interdependence be incorporated in models of production
and performance. However, only a handful of empirical studies
have examined the effects of financial variables, especially the
agency cost of debt and the signaling benefit of dividend pay-
ment, on output, input demand, profitability, and productivity
growth. Further, all these studies focused on either a nonfood
industry or the entire manufacturing sector. 2 Despite signifi-
cant changes in its capital structure, the implications of these
changes have not been explored in the context of the U.S. food
manufacturing industry.
This study contributes to the literature by exploring the im-
plications of financial structure changes (i.e., changes in the
debt–equity mix) on the production and performance of the
U.S. food manufacturing industry. The specific objectives of
this study are (a) to examine if the real economic variables
are affected by the financial structure (i.e., debt–equity mix)
of the industry; (b) to estimate the impacts of the agency cost
of debt and the signaling benefit of dividend payment on out-
put supply, input demand, and profitability of the industry; (c)
to obtain estimates of capital adjustment costs (arising from
capital installation costs as well as from increased debt financ-
ing by the industry) and technological progress; and (d) to
isolate the contributions of technological progress, capital ad-
justment, agency cost (of increased debt), and signaling benefit
to total factor productivity growth in the U.S. food manufactur-
ing industry. This analysis provides empirical evidence of the
1 See Hubbard (1998) for a comprehensive survey on this issue.
1985 1990 1995 2 These include Kim and Maksiovic (1990) and Greenwald et al. (1990) who
analyzed the effects of the agency cost of debt on the productivities of the U.S.
All Manufacturing airline industry and the aggregate manufacturing sector, respectively. Bernstein
and Nadiri (1993) examined the effects of the agency cost of debt and the
signaling benefit of dividend payment on the production and performance of
the overall U.S. manufacturing sector.
 F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410
interdependence of real and financial decisions of firms as im-
plied by recent theoretical literature in financial economics.
Further, by estimating the impacts of increased debt on pro-
duction and performance, this study provides an insight into
the effects of debt accumulation by the U.S. food industry (that
ran parallel to increased M&A activity in the industry) on its
performance.
2. Conceptual framework and empirical model
This study implements the modeling framework of Bernstein
and Nadiri (1993) using data from the U.S. food manufacturing
industry (SIC 20). This model integrates the production and
financing decisions of a firm by including managerial decision
as an input in the production function. The managerial input
reflects the services of planning, organizing, and monitoring
input use to ensure efficient production. The model assumes
that capital is a quasi-fixed input and that capital adjustment
costs arise from capital installation as well as new debt issue.
The production process is described by the following function:


yt = F xt , xtm , Kt−1 ,
Kt , t , (1)
where y is output, x is an n-dimensional vector of variable
inputs, xm is the managerial input, K is capital (the quasi-fixed
input),
K is the change in capital, and t is a time trend (the
technology indicator). The production function has the usual
properties: F  > 0, F  < 0 with respect to x i , and K and F  <
0, F  < 0 with respect to
K. In this model, capital adjustment
cost is defined in terms of foregone output as a result of resource
allocation for capital installation, which is captured by
K in
the production function.
The manager is responsible not only for organizing the pro-
duction process via efficient input use, but also for arranging
the necessary financing. However, asymmetric information be-
tween the manager, shareholders and creditors can lead to in-
centive divergence among agents. Shareholders and creditors
can monitor managerial decisions only by incurring cost. Infor-
mation asymmetry between the manager and creditors, along
with cost of monitoring, can lead to an agency problem, which
increases the cost of borrowing (Greenwald et al., 1990; Jensen
and Meckling, 1976; Stiglitz and Weiss, 1981). The increase
in the cost of borrowing due to the presence of asymmetric
information (the agency cost of debt) is traded off against tax
savings associated with interest payment on debt.
Management can use various signaling mechanisms to over-
come problems associated with information asymmetry. Divi-
dend payment and new share issue are examples of signaling
devices used by firms (Bernheim, 1991; Myers and Majluf,
1984; Ross, 1977). Specifically, by paying dividends manage-
ment signals that the firm is in a good financial position with
adequate net cash flow. Since dividend income is taxed under
existing tax laws, the signaling benefit of dividend payment is
traded off against the associated extra tax liability (Poterba and
Summers, 1985).
401
Bernstein and Nadiri (1993) incorporate the signaling benefit
of dividend payment and agency cost of debt into the model by
defining the following managerial cost function:
ctm = µG (Dt , Bt−1 ,
Bt ) , (2)
where
cm = managerial cost,
µ = the price of managerial input,
D = dividend payment,
B = the value of the firm’s outstanding bonds, and

B = the value of new bond issue.
The function G in Eq. (2) above reflects the firm’s ability to
finance its operations, which is decreasing in debt and increas-
ing in dividend. Both outstanding debt and new bond issue are
subject to agency cost. In this model, the agency cost associ-
ated with new bond issue is defined as the debt adjustment cost.
The managerial input (xm ) is linked to the G function in the
sense that an increase (decrease) in the firm’s financing ability
increases (decreases) its managerial input cost by increasing
(decreasing) the demand for managerial services. This can be
seen by taking partial derivative of Eq. (2) with respect of the
t = (dct /dµ) = G(D t ,
managerial input price (µ) to obtain x m m
B t−1 ,
B t ). Thus, the G function represents the managerial
input demand.
Substitution of x mt into Eq. (1) yields the following aug-
mented production function that links output supply and input
demand to financial variables:
yt = F (xt , Dt , Bt−1 , Kt−1 ,
Kt ,
Bt , t) . (3)
In this framework, an increase (decrease) in outstanding debt
lowers (increases) managerial input demand, which in turn de-
creases (increases) output and thereby affects demand for other
inputs. Similarly, new debt issue and dividend payments gener-
ate output and input effects.
The stock of capital follows the process:
Kt = It + (1 − δ) Kt−1 , (4)
where, 0 < δ < 1 is the fixed depreciation rate and I t is the in-
vestment in time t. The flow of funds that relates the production
and financing decisions is given by the following equation:
P1,t yt − PTt xt − Qt It − Rt Bt−1 +
Bt +
Sn,t − Dt = 0,
(5)
where
P 1 = after-tax price of output (y),
PT = a vector of after-tax prices of variable inputs (x),
Q = the after-tax purchase price of capital,
R = the after-tax interest rate on debt,

S n = value of new share issue,
B = the value of the firm’s outstanding bonds,

B = the value of new bond issue, and
D = dividend payment.
402 F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410

The firm makes its production and financing decisions to Thus, the variable profit (net of dividend payments) function is
maximize the expected discounted value of equity. This opti- given by 3
mization problem can be descried as follows:
v 
n+1
max ln( /Pn+2 ) = β0 + βi ln (Pi /Pn+2 )
{yt ,xt ,It ,Dt ,
Sn,t ,
Bt } i=1

∞

Et αt,τ Dτ (1 − up,τ )/(1 − ug,τ ) −
Sn,τ , (6) 
B
τ =1 + βk ln Kk + βt t
k=K

subject to Eqs. (3)–(5), given initial capital stock (K) and debt 
n+1 
n+1


level (B). In Eq. (6), the discount factor is given by α t,t = 1, + 0.5  βij ln (Pi /Pn+2 ) ln Pj /Pn+2
α t,t+1 = [(1 + ρ t+1 (1 − u p,t+1 )/(1 − u g,t+1 ))]−1 where ρ is i=1 j =1
the discount rate, u p is the personal income tax rate, and u g is 
capital gains tax rate. 
B 
B
+ βks ln Kk ln Ks + βtt t 2
It is assumed that 0 < u g <u p < 1 is consistent with existing
k=K s=K
tax laws. Shareholders are subject to dividend tax at the same
rate as personal income tax. 
n+1 
B

The above optimization problem can be solved in two stages. + βik ln (Pi /Pn+2 ) ln Kk
i=1 k=K
In the first stage, the short-run equilibrium of the firm is deter-
mined by choosing output, variable inputs, and the dividend to 
n+1 
B

maximize the after-tax variable profit net of dividend payment. + βit ln (Pi /Pn+2 ) t + βkt ln Kk t,
This is obtained by solving the following optimization problem i=1 k=K
(9)

max where P i is the after-tax price of variable input i (i = 3, . . . , n

{yt ,xt ,Dt } P1,t yt − P2,t Dt − Pt xt ,
T
(7)
+ 2), and all other notation is as defined above.
It is assumed that marginal capital and debt adjustment costs
subject to Eqs. (3) and (5), conditional on the capital stock and are zero when there is no new (net) investment and bond issue.
debt level, where This allows the separation of adjustment costs from other el-
P 2 = (u p − u g )/(1 − u g ) = the price of dividend that ements of net variable profit. Furthermore, both new debt and
is the additional tax shareholders have to pay per dollar of capital expansion affect the marginal adjustment costs of both
dividend relative to receiving a dollar of capital gain, and all capital and debt. This reflects the fact that often new debt is is-
other notation is as defined above. sued to finance capital expansion. The adjustment cost function
In this setting, output supply and variable input demand are is specified as follows:
affected by changes in the dividend price while the dividend
payment is affected by output and variable input prices. The debt 
B 
B
level affects output and variable inputs through its effects on the ca = 0.5 αks
Kk
Ks ,αks = αsk . (10)
managerial input and substitution between the managerial input k=K s=K
and variable inputs. A change in outstanding debt affects the
dividend payment through agency cost. Capital accumulation The short-run equilibrium conditions are obtained by apply-
and technological change affect dividend payment via their ing Hotelling’s Lemma to Eq. (9) are
effects on the marginal productivity of the managerial input.
The solution to the optimization problem described by Eq. (7) 
n+1

 B

generates an after-tax variable profit function (net of dividend si = βi + βij ln Pj /Pn+2 + βik ln Kk
j =1 k=K
payment) given by

 + βi t, i = 1, 2, . . . , n + 1, (11)
vt =  P1,t , P2,t , PTt , Kt−1 , Bt−1 ,
Kt ,
Bt , t (8)
where
where v is the after-tax variable profit net of dividend payment, s 1 = P 1 y/v = share of output in net variable profit (v ),
and all other notation is as defined above. s 2 = –P 2 D/v = share of dividend in net variable profit, and
The above conceptual framework is empirically implemented s i = –P i x i /v = share of input i (i = 3, . . . , n + 1) in net
by specifying a translog functional form for the variable profit variable profit.
function. This flexible functional form is selected because it pro-
vides a second-order approximation to any continuous, twice 3 Homogeneity of degree one of the variable profit function in prices is im-
differentiable function. Because of its flexibility and mathe- posed by normalizing the variable profit (v ) and prices by the price of one
matical tractability, the translog profit function has been widely variable input. Symmetry (i.e., β ij = β ji , and β ks = β sk ) is imposed. Henceforth,
used in applied research (Antle, 1984; Klein and Kyle, 1997). the time subscript is omitted to simplify notation.
 F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410 403

Thus, in the short-run equilibrium, the output, dividend, and the adjustment cost. Equation (14) implies that, in equilibrium,
variable input components of v depend on relative output and the expected marginal reduction in after-tax profit in period t +
input prices, capital stock, debt level, and technology. 1 due to the agency cost of debt (inclusive of interest payment
In the second stage of the optimization problem described by but net of expected debt adjustment cost saving from previous
Eq. (6), the firm makes its financing decision by choosing the period’s debt issue) is offset by the current period’s additional
optimal debt level and new share issue. Substituting Eqs. (4) fund from a dollar of debt net of marginal debt adjustment cost.
and (8) into Eq. (6), this part of the optimization problem can
be expressed as
3. Data and estimation
∞

max
E αt,τ [v − Rτ Bτ −1 + Bτ − Bτ −1 The data used in this study relate to the U.S. food manufac-
{Kτ ,Bτ } t
τ =1 turing industry (SIC 20) and cover the 1960–1996 period. Data
− Qτ (Kτ − (1 − δ)Kτ −1 )], (12) on quantities and implicit price indices of output and inputs
are obtained from the National Bureau of Economic Research
where δ is constant depreciation rate. (NBER) Manufacturing Productivity Database. 4 The input and
The optimal levels of capital and debt are obtained by solving output quantities and price data from the NBER database (at
the optimization problem in Eq. (12), which in turn allows the the 4-digit SIC level) are first converted to real values at 1987
determination of investment and new debt issue. Output supply, prices and then aggregated to the 2-digit SIC level by adding
dividend payment, and variable input demand are determined by up across industries. The aggregate price indices (at the 2-digit
substituting the optimal levels of capital and debt into Eq. (11). SIC level) are calculated as weighted averages of price indices
New share issue is obtained by plugging in the optimal solutions of disaggregated industries using the revenue or cost shares as
for output, variable inputs, dividend payment, investment, and weights.
debt into Eq. (5). Output is measured by the real value of shipment and does not
Substituting Eqs. (9) and (10) into Eq. (12) and solving the include inventory change. 5 There are two variable inputs, labor
intertemporal optimization described in the latter leads to the and material (including energy), and a quasi-fixed input, capital.
following two Euler equations: The quantity of labor input is defined in millions of hours and
 includes only production workers. The nominal hourly wage
rate is obtained by dividing the total production wage bill by the
− αKK
Kt − αKB
Bt − Qt + Et αt,t+1 βK + βKK ln Kt
total hours worked. The real wage rate is obtained by deflating
the nominal wage rate by the GDP deflator obtained from the

n+1

 Bureau of Labor Statistics.
+ βKB ln Bt + βiK ln Pi,t+1 /Pn+2,t+1
The dollar value of Cash Dividends Charged to Retained
i=1

Earnings (for SIC 20), obtained from the Quarterly Financial

 Report (QFR), is used as total dividend payment. The real value
+ βkt (t + 1) vt+1 Pn+2,t+1 /Kt + αKK
Kt+1
of dividend payment is obtained by deflating the nominal div-
 idend payment by the GDP deflator. The price of dividend is
+ αKB
Bt+1 + Qt+1 (1 − δ) = 0, (13) defined earlier (see Eq. 7). Data on tax rates on dividend income
and capital gains are obtained from Feldstein and Jun (1987) for
 the 1960–1984 period. These rates are updated for other years
−αBB
Bt − αKB
Kt + 1 + Et αt,t+1 βB + βBB ln Bt using information obtained from the Office of Tax Analysts at
the U.S. Department of Treasury.
Real capital stock, in 1987 dollars, and the implicit defla-

n+1

 tor for new investment are from the NBER database. Capi-
+ βKB ln Kt + βiB ln Pi,t+1 /Pn+2,t+1
tal includes equipment capital, structures, and buildings. The
i=1

after-tax purchase price of investment is calculated as Q t =


+ βBt (t + 1) vt+1 Pn+2,t+1 Bt + αBB
Bt+1 P I (1 − ω k − u c z) where P I is the investment deflator, ω k is
the investment tax credit, u c is the corporate income tax rate,

and z is the present value of capital consumption allowance. In-
+ αKB
Kt+1 − Rt+1 − 1 = 0. (14) vestment tax credit was first instituted in 1962 so that ω k = 0 for
1960 and 1961. Data on the investment tax credit for 1962–1981
Equation (13) shows that, in equilibrium, the expected 4 Available online from NBER at http://www.nber.org/nberces/bbg96_87.xls
marginal after-tax return from capital in period t + 1 (inclu- 5 Inventory measure in NBER data is based on two different methods before
sive of expected adjustment cost and after-tax purchase price and after 1982. Due to the lack of consistency between these two measures,
saving from the previous period’s nondepreciated capital) is off- inclusion of inventory change would probably lead to serious measurement
set by the current period’s after-tax purchase cost of capital plus errors.
404 F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410

from Jorgenson and Sullivan (1981) and the corporate income Table 1
tax rate for 1960–1985 from Pechman (1987) were updated Estimated model coefficients, standard errors, and t-ratios
using information generously provided by Jeffrey Bernstein of Parameters Estimaste Standard error t-ratio
Carleton University. The present value of capital consumption
β0 11.1127 2.2162 5.01
allowance is obtained as z = λ(1 − ηωk )/(r + λ) where λ is β1 3.0184 1.1183 2.70
the ratio of capital consumption allowance to capital stock less β2 −0.4101 0.1484 −2.76
treasury stock at cost (both obtained from the QFR), η is 0.5 for β3 −0.9199 0.2563 −3.59
1962 and 1963 and zero elsewhere, 6 ω k is the investment tax βK −3.3653 1.1471 −2.93
βB −0.1518 0.0766 −1.98
credit, and r is the yield on 10-year U.S. Treasury bonds.
βt 0.1102 0.0384 2.87
The stock of debt is defined as the sum of installments due β 11 0.8486 0.6792 1.25
in more than one year on long-term loans from banks and other β 22 −0.1204 0.0320 −3.76
long-term debt. Both are defined as the end of the period values β 33 −0.0513 0.0193 −2.66
for the fourth quarter and are obtained from the QFR. The in- β KK 0.3492 0.1664 2.10
β BB 0.0019 0.0005 3.80
terest rate on debt is measured by the yield on 10-year Treasury
β tt −0.0008 0.0004 −2.00
bonds. The effective discount rate is given by ρ(1 − u p )/(1 − β 12 −0.0202 0.0133 −1.52
u g ), where ρ is the annual rate of return on equity in the food β 13 −0.1238 0.0871 −1.42
industry (SIC 20) obtained from the QFR. β 23 0.1251 0.0330 3.79
The empirical model consists of Eqs. (9), (11), (13), and β KB 0.0049 0.0016 3.06
β 1K 0.1344 0.0685 1.96
(14). The adjustment cost function (Eq. (10)) is not estimated
β 2K −0.0054 0.0021 −2.57
because its parameters are contained in Eqs. (13) and (14). The β 3K 0.0441 0.0259 1.70
endogenous variables of the model are after-tax net variable β 1B −0.0297 0.0185 −1.61
profit, output, labor, and dividend shares in variable profit, cap- β 2B 0.0048 0.0018 2.67
ital, and debt. For estimation purposes, error terms with zero β 3B 0.0186 0.0081 2.30
β 1t −0.0486 0.0097 −5.01
mean are added to Eqs. (9) and (11). Error terms are intro-
β 2t −0.0010 0.0004 −2.50
duced in Eqs. (13) and (14) by replacing the expected values β 3t 0.0052 0.0009 5.78
of the variables by their realized values. It is assumed that the β Kt −0.0062 0.0023 −2.70
error structure forms a positive definite symmetric covariance β Bt 0.0012 0.0003 4.00
matrix. α KK 0.0089 0.0045 1.98
α KB −0.0002 0.0001 −2.00
Since the equations in the empirical model contain expected
α BB 0.0030 0.0013 2.31
future values of variables, we use Hansen and Singleton‘s
(1982) GMM estimator to estimate the system. This estimator is
equivalent to nonlinear 3SLS under homoskedastic errors; it is 4.1. Financial decisions, production, and profitability
consistent and efficient for the set of instruments used (Pindyck
and Rotemberg, 1983). Lagged values of relative (after-tax) In the model of production and financing used in this study,
prices, interest rate, after-tax purchase price of capital, after-tax output and input prices affect dividend payment, which in turn
variable profit, capital, and debt are used as instruments for affects output supply and input demand. Financing decisions
implementing the GMM procedure. affect output supply, input demand, and profitability through
the effects of changes in dividend price (via changes in tax
rates) and debt level on production and profitability. The effects
4. Empirical results
of changes in the prices of output, variable inputs, and dividend
are computed as short-run price elasticities as follows:
The estimated model coefficients along with their standard
errors are reported in Table 1. The model coefficients are well eij = (βij + si sj − δij si )/si
determined and most of them are statistically significant. The
validity of over-identifying restrictions in the empirical model i, j = output, dividend, labor, and material input,
is tested using the J-statistic. For our model, this statistic is where e ij = elasticity of the ith quantity with respect to the jth
distributed as χ 2 with 47 degrees of freedom. The estimated price, δ ij = 1 if i = j, and δ ij = 0 if i = j.
value of the J-statistic is 42.24, which is less than its 95% Recall that s i > 0 for output and s i < 0 for dividend and vari-
critical value (χ 247,0.95 = 64.00). Therefore, the null hypothesis able inputs. Price elasticities for material input are calculated
that the model is correctly specified cannot be rejected. after recovering the relevant coefficients from the homogeneity
restriction. The share of material input in net variable profit is
obtained as s 4 = 1 − s 1 – s 2 – s 3 .
6 The constant η reflects the provision under the Long Amendment by which
The estimated price elasticities and the associated standard
firms had to lower their depreciable base of assets by the amount of the Invest- errors are reported in Table 2. These elasticities show that an
ment Tax Credit (see Bernstein and Nadiri, 1993, for additional information). increase in the output price leads to increases in output supply,
 F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410 405

Table 2 Table 3
Estimated short-run price elasticities Elasticities with respect to capital, debt, and technological change

Price Capital Debt Technology

Output Dividends Labor Materials Output 0.767 −0.105 0.096
(0.117) (0.032) (0.039)
Output 1.530 −0.162 −0.641 −0.727 Dividend 0.737 −0.376 0.181
(0.265) (0.026) (0.114) (0.317) (0.161) (0.076) (0.073)
Dividend 2.264 −0.361 −1.406 −1.498 Labor 0.629 −0.181 0.121
(0.659) (0.081) (0.722) (0.588)
(0.068) (0.042) (0.041)
Labor 2.043 −0.367 −1.495 −0.482
Materials 0.885 −0.156 0.112
(0.371) (0.045) (0.251) (0.476)
(0.201) (0.035) (0.048)
Materials 1.9110 −0.293 −0.710 −1.009
Variable profit 0.708 −0.219 0.151
(0.663) (0.051) (0.076) (0.591)
(0.183) (0.041) (0.037)
Note: Elasticities are computed at mean values. Standard errors are in
Note: Elasticities are computed at mean values and standard errors are in
parentheses.
parentheses.

dividend payment, and demand for variable inputs. An increase
in dividend price (i.e., increase in personal income tax rate rela-
tive to capital gains tax rate) leads to declines in output supply,
dividend payment, and demand for variable inputs. Increases in
the prices of the variable inputs negatively affect output supply
(as expected), dividend payment, and demand for both inputs.
Dividend payment seems to respond more to changes in output
and input prices than to changes in its own price. The vari-
able input demand seems to decline more than output supply in
response to an increase in the price of dividend.
Changes in tax policy affect the dividend price which in turn
affects variable profit via its effects on output and demand for
variable inputs. The after-tax variable profit (before dividend
payment) is given by π v = v (1 − s 2 ). The elasticity of π v
with respect to dividend price is given by
eπ2 = [s2 (1 − s2 ) − β22 ] /(1 − s2 ).
Our model coefficients yield an estimated value of −0.114 (with
SE = 0.014) for e π2 which implies that a 1% increase in the div-
idend price (i.e., a 1% increase in the income tax rate relative to
capital gains tax rate) leads to a roughly 0.11% decrease in the
variable profit before dividend payment (π v ). Thus, although
the estimated value of e π2 implies a rather inelastic response of
variable profit to dividend price changes, its statistical signif-
icance suggests considerable effects of tax policy changes on
the profitability of the U.S. food industry.
The signaling benefit of dividend payment can be defined
in elasticity form as the percentage change in π v relative to a
percentage change in dividend payment due to a 1% change
in dividend price, which can be computed as eπD = eπ2 /.e22 ,
where e π2 and e 22 are as defined earlier. 7 Using our model
coefficients, the signaling benefit of dividend payment (e πD ) is
7
Change in dividend price affects dividend payment, which in turn, affects
variable profit. The elasticity of after-tax variable profit (before dividend pay-
ment), π v , with respect to dividend payment (i.e., the signaling benefit of div-
v p2 ∂π v ∂D
idend payment) can be computed as follows: eπ2 = πp2v ∂π ∂p2 = π v ( ∂D ∂p2 ) =
v p2 ∂D
∂D )( D ∂p2 ) = eπ D e22 . The signaling benefit of dividend payment (e π D )
( πDv ∂π
is given by (e π2 /(e 22 ).
estimated as 0.316. This implies that, during the period covered
by this study, a 1% increase in dividend payment increased the
variable profit of the U.S. food industry by about 0.32%.
Output supply, input demand, variable profit, and dividend
payment depend on technology, the capital stock as well as the
level of debt. The effects of debt, capital, and technology on
output supply, variable input demand, and dividend payment
can be computed as
eij = βij /si + eφj ,
where e φj is effect of j (j = capital, debt, technology) on after-tax
net variable profit.
The estimated values of these elasticities and their standard
errors are reported in Table 3. All are statistically significant.
Furthermore, the negative signs of the elasticities with respect
to debt clearly show that an increase in debt has negative effects
on output supply, variable input demand, and dividend payment.
A 1% increase in debt causes a roughly 0.11% fall in output
supply, a 0.18% decline in labor demand, a 0.16% drop in
material demand, and a 0.38% decline in dividend payment.
These elasticities provide clear evidence that during the period
covered by this study, rapid increase in the use of debt financing
resulted in a considerably lower pace of output growth, variable
input demand, and dividend payment in the U.S. food industry.
The agency cost of debt can be defined as the reduction in
after-tax variable profit before dividend payment (π v ) due to an
increase in the level of debt. In elasticity form, this is given by
e πB = [e φB (1 − s 2 ) − β 2B ]/(1 − s 2 ), where e φB is the effect
of debt on net variable profit. Using our model coefficients, we
obtain an estimated value of –0.219 (with SE = 0.041) for e πB
(agency cost of debt). This result provides evidence that the
rapid increase in debt in the U.S. food industry significantly
reduced the profitability of this industry. Specifically, on aver-
age a 1% increase in total debt resulted in a 0.22% reduction in
variable profit. The finding that profitability declines with debt
level is consistent with the notion that increases in debt cause
agency cost to rise. Our estimated elasticity of variable profit
with respect to debt (i.e., the agency cost of debt) is somewhat
406 F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410

higher than that obtained by Kim and Maksimovic (1990) for Eqs. (13) and (14), are reported in Table 1. The positive signs
the U.S. airline industry, and Bernstein and Nadiri (1993) for of α KK and α BB imply that net capital expansion and new debt
the aggregate U.S. manufacturing sector. This is not surprising issue increase marginal adjustment cost via installation cost
given that the debt ratio of the U.S. food manufacturing sec- and marginal agency cost, respectively. The negative sign of
tor has consistently exceeded that of the overall manufacturing α KB implies that the agency cost of debt is reduced when cap-
sector. ital expansion is financed through new debt issue (i.e., capital
The estimated elasticities with respect to capital and technol- expansion and debt issue are adjustment complements). The
ogy, also reported in Table 3, show that capital expansion and estimated adjustment cost coefficients yield (αKK αBB − α 2KB ) >
technological progress have positive effects on output supply, 0, implying convexity of adjustment costs in net capital invest-
input demand, profitability, and dividend payment. This sug- ment and new debt issue.
gests that capital investment and technological progress miti- In the long-run equilibrium when the marginal adjustment
gated the negative effects of increased debt on output growth cost of debt is zero, the reduction in variable profit due to the
and profitability in the U.S. food industry. These elasticities agency cost of debt is the difference between after-tax rate of
also show that capital expansion had greater impacts on pro- return to shareholders and the after-tax interest rate on debt.
duction and profitability than technological progress. Also, we In terms of our model coefficients, this is given by W B,t = ρ t
find that when capital is financed with debt, the positive effects (1 − u p,t )/(1 − u g,t ) − r t (1 − u c,t ). In the long-run equilib-
of capital expansion far outweigh the negative effects of debt rium, the ratio of marginal agency cost of debt to net opportunity
increase. In fact, the results presented in Table 3 suggest that cost of funds is equal to one. The relative importance of debt
capital is the key factor affecting production, profitability, and adjustment cost (as the system deviates from long-run equilib-
dividend payment in the U.S. food industry. rium) is given by the ratio of marginal debt adjustment cost to
The empirical results reported above clearly show that pro- the net opportunity cost of funds. This is given by [(α BB
B t +
duction and profitability in the U.S. food industry are affected α KB
K t )/
B t ]/W B,t . Similarly, in the long-run equilibrium,
by financing decisions of firms in this industry and demonstrate marginal profit from capital expansion is the after-tax rental
the need to incorporate the interdependence of real and finan- rate of capital (the opportunity cost of capital services), which
cial variables in modeling firm behavior. These results have is given by W K,t = Q t [ρ t (1 − u p,t )/(1 − u g,t ) + δ]. The
important implications, especially in the context of the ongo- relative significance of capital adjustment cost (as a result of
ing debate in the United States on the proposed elimination of deviating from the long run-equilibrium) is given by the ratio of
taxes on dividend payment. It has been argued that the current marginal capital adjustment cost to the opportunity cost of capi-
policy of taxing dividend (while interest payment on debt is tax tal services. Using our model coefficients, this can be computed
deductible) favors debt over equity as a financing mechanism. as [(α KK
K t + α KB
B t )/
K t ]/W K,t . Note that the marginal
The results of this study show that this policy has had nega- adjustment costs arise due to changes in capital stock and debt
tive effects on output growth, input demand, and profitability level, and are unaffected by the absolute levels of capital stock
in the U.S. food industry. Therefore, the elimination of taxes and outstanding debt.
on dividend is likely to reduce debt dependence and thereby The computed marginal adjustment costs associated with
promote output growth and profitability. Further, if enacted, the capital expansion and new debt issue are reported in the first two
proposed dividend tax elimination will lower taxes on capital, columns of Table 4. The relative marginal debt adjustment cost
which will foster capital investment in the long run. The in- averaged 0.059 during 1961–1996, implying that for a US$1.00
creased pace of capital formation will have significant positive
effects on output growth, input demand (and hence factor re-
Table 4
wards), and profitability of the U.S. food industry. Further, it has Adjustment cost, returns to scale, and rate of technological change
been argued that dividend taxation has led corporations to re-
duce their dividend payout ratios (Becker, 2003). The proposed Marginal Returns Rate of
adjustment scale technological
tax policy change is likely to encourage managements to in- cost change
crease the payout ratios, which would not only enhance growth
and profitability via signaling benefit, but would also help mon- Capital Debt
itor corporate governance by forcing management to reenter 1961–1970 0.184 0.055 0.927 0.011
the equity market more frequently to finance investments and (0.027) (0.014) (0.049) (0.001)
expansions. 1971–1980 0.115 0.058 0.942 0.010
(0.028) (0.017) (0.077) (0.001)
1981–1990 0.074 0.078 0.952 0.012
(0.016) (0.025) (0.130) (0.001)
4.2. Adjustment costs 1991–1996 0.068 0.045 0.953 0.013
(0.011) (0.010) (0.151) (0.001)
The adjustment costs in our model reflect the costs asso- 1961–1996 0.112 0.059 0.939 0.012
(0.046) (0.208) (0.228) (0.003)
ciated with both capital expansion and new debt issue. The
estimated adjustment cost coefficients, α KK , α KB , and α BB in Note: Figures in parentheses are standard deviations.
 F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410
opportunity cost of debt, there was an additional adjustment
cost of about US$0.059. The debt adjustment cost varied over
the years due to changes in total debt as well as capital stock.
For instance, although total debt increased more rapidly in the
1960s than in the 1970s, there was very little variation in the
debt adjustment cost due to adjustment complementarity (α KB
< 0) and faster capital expansion during the 1960s. During
the 1980s, the total debt of the industry increased dramatically
accompanied by the slowest pace of capital expansion. As a
result, the marginal debt adjustment cost was the highest dur-
ing the 1980s. After reaching its peak in 1989, the total debt
of the industry fell somewhat during 1990–1991 and remained
stable during the remaining years covered by this study. This
resulted in the lowest marginal debt adjustment cost during the
1991–1996 period. The average relative capital adjustment cost
was US$0.112 during the entire 1961–1996 period, implying
that for US$1.00 rental of capital services, there was an addi-
tional US$0.112 capital installation cost. Thus, for US$1.00 of
capital services financed through new debt, the total adjustment
cost was US$0.171, of which US$0.112 was capital installation
cost and US$0.059 was debt adjustment cost. Our estimates
of capital adjustment cost are similar to those of Pindyck and
Rotemberg (1983) and Bernstein and Nadiri (1993).
4.3. Returns to scale, technological change, and productivity
growth
Returns to scale are defined as the proportional change in
output in response to growth in inputs (including the quasi-fixed
input). Under the standard assumption of constant managerial
input and technology, returns to scale are obtained from the
after-tax variable profit function as

n+2
RTS = − si /s1 + (∂ ln  /∂ ln K)/s1 .
v
(15)
i=3
The rate of technological change is obtained from the variable
profit function as
RTC = (∂ ln v /∂t)/s1 . (16)
Our empirical estimates of returns to scale and rate of tech-
nological change in the U.S. food industry are reported in the
last two columns of Table 4. The point estimates of returns to
scale are slightly below unity for the entire 1961–1996 period
as well as for each of the subperiods. However, none of these
estimates is statistically different from unity which implies that
the U.S. food industry is essentially a constant returns to scale
industry. This suggests that the existence of scale economies
might not have been a major driver of mergers and acquisitions
in this industry. In fact, there is very little empirical evidence
in the literature to indicate that recent mergers and acquisitions
in the United States enhanced efficiency of the companies in-
volved in these transactions (Mueller, 1997). Similarly, Bhuyan
407
(2002) analyzed the impact of vertical mergers on the profitabil-
ity of disaggregated (at 4-digit SIC level) food industries in the
United States and found that such mergers had negative im-
pacts on profits. This finding clearly contradicts the notion that
these mergers were motivated by the cost-saving potential due
to scale economies. These mergers and acquisitions might have
been driven by factors such as competition for corporate con-
trol, tax policy, opportunity for short-run gains through leverage
buyouts (facilitated by financial market developments) or the
pursuit of market power.
The estimated average rate of technical change in the U.S.
food industry was 1.2% for the entire 1961–1996 period covered
by this study. It varied between 1.00% (during 1971–1980)
and 1.3% (during the 1991–1996 period). Thus, the rate of
technical change was modestly higher during 1981–1996 than
over the 1961–1980 period. Overall, the U.S. food industry
experienced a slower rate of technical progress relative to the
overall manufacturing sector. For instance, both Bernstein and
Nadiri (1993) and Gullickson (1995) estimated a 1.3% annual
rate of technological change for the aggregate manufacturing
industry.
The productivity performance of the U.S. food industry is
examined by estimating total factor productivity (TFP) growth
and identifying its various sources. We obtain an expanded
decomposition of TFP growth that not only includes the con-
tributions of technological change and scale effects, but also
incorporates the effects of agency cost of debt and signaling
benefit of dividend payment. TFP growth is defined by

TFPG = d ln y − (Pi xi /C)d ln xi − (Wk K/C)d ln K.
i=L,M
(17)
Taking total differential of Eq. (8)
and the after-tax net vari-
able profit function v = P1 y − i=L,M Pi xi − P2 D, and
utilizing Hotelling’s Lemma yields

s1 d ln y + si d ln xi + s2 d ln D
i=L,M
= (∂ ln v /∂ ln K) d ln K
+ (∂ ln v /∂ ln B) d ln B + ∂ ln v /∂t. (18)
Multiplying both sides of (18) by (v /C) and adding (17) to
both sides of (18) leads to
TFPG = (1 − (v /C)s1 ) d ln y + (v /C)∂ ln v /∂t
+ [(v /C)(∂ ln v /∂ ln K
− (Wk K/C)d ln K)] + (v /C)s2 d ln D
+ (v /C)(∂ ln v /∂ ln B)d ln B. (19)
Equation (19) identifies five components of TFP growth. The
first term represents the scale effect, the second term reflects
technological change, the terms within square brackets capture
408 F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410

Table 5
Total factor productivity growth and decomposition

Scale Technological Capital Dividend Debt TFPG

change adjustment

1961–1970 −0.0038 0.0113 0.0032 0.0008 −0.0017 0.0098

(0.0014) (0.004) (0.0012) (0.0004) (0.0011) (0.0035)
1971–1980 −0.0040 0.0107 0.0036 0.0007 −0.0018 0.0092
(0.0016) (0.002) (0.0017) (0.0010) (0.0021) (0.0026)
1981–1990 −0.0039 0.0099 0.0025 0.0005 −0.0020 0.0070
(0.0012) (0.0014) (0.0011) (0.0004) (0.0011) (0.0022)
1991–1996 −0.0037 0.0101 0.0037 0.0008 −0.0012 0.0098
(0.0021) (0.0017) (0.0012) (0.0002) (0.0004) (0.0023)
1961–1996 −0.0039 0.0105 0.0032 0.0007 −0.0017 0.0089
(0.0017) (0.0022) (0.0019) (0.0006) (0.0011) (0.0038)

Note: Figures in parentheses are standard deviations.

the capital adjustment effect, the fourth term reflects the signal-
ing benefit of dividend payment, and the last term captures the
effect of agency cost of debt on TFP growth.
Results of the TFP decomposition are presented in Table 5.
These results show that average TFP growth in the U.S. food
industry was 0.89% per year during the 1961–1996 period.
The growth rate was slower during 1981–1990 than in other
periods. Our estimated TFP growth rate for the food industry
is much lower than those estimated for the agricultural sector
(e.g., 1.94% reported by Ball et al., 1998) as well as for the
overall manufacturing sector (1.3% reported by Gullickson,
1995). It is also lower than the 1.2% annual TFP growth rate
in the food industry during the 1964–1984 period reported by
Adelaja (1992). However, our estimates are slightly higher than
some recent estimates such as 0.41% by Gopinath et al. (1996),
and 0.54% by Jorgenson and Stiroh (2000), and are very similar
to 0.775% reported by Morrison (1997) and 0.82% by Chan-
Kang et al. (1999).
The faster pace of productivity growth in the agricultural
sector compared with the food manufacturing sector may be
attributed to large public investments in agricultural research
and development (R&D) and extension service. In contrast,
food manufacturing industry is well known for its low R&D
expenditures. The difference between our estimates of TFP
growth and those of other authors may be due to differences in
methodology as well as the data used in the analysis. One major
difference between our approach and others is that none of the
studies cited above incorporate the effects of debt and dividend
payment in modeling productivity growth. Another potential
source of variation in the empirical findings is the data source
and variable definitions. For instance, our study uses data from
the NBER productivity database, whereas Jorgenson and Stiroh
(2000) use the 1999 revision of National Income and Product
Accounts (NIPA) data. Their definition of capital differs signif-
icantly from that used in the NBER database. Furthermore, they
use an extended growth accounting framework rather than the
structural model approach used here. Adelaja’s (1992) results
are based on state level data for New Jersey and the time period
covered by his study differs from ours. Gopinath et al. (1996)
focus on the existence and importance of spillover effects be-
tween production agriculture and the food processing sector.
Their methodology is different from our structural modeling
approach.
The signaling benefit of dividend payment accounted for
about 8% of the estimated TFP growth. We are unable to com-
pare our estimate of the signaling benefit of dividend payment
with other studies of the U.S. food industry. In the context
of the aggregate U.S. manufacturing industry, Bernstein and
Nadiri (1993) estimated a 4.2% contribution of the signaling
benefit of dividend payment to overall TFP growth.
The agency cost of debt made a negative contribution to TFP
growth in the U.S. food industry. For the 1961–1996 period, the
agency cost of debt reduced TFP growth by 0.0017 or 19% of
the overall TFP growth. This is about three and a half times the
negative contribution of debt to TFP growth in the aggregate
manufacturing sector computed by Bernstein and Nadiri (1993),
and about four times that found by Kim and Maksimovic (1990)
for the U.S. airline industry. This result is consistent with the fact
that the debt burden of the U.S. food industry exceeded that of
the aggregate manufacturing sector or the airline industry over
the entire period covered by this study. We also find that, for
the U.S. food industry, the negative impact of the agency cost
of debt was much higher than the positive contribution of the
signaling benefit of dividend payment. This suggests that to the
extent M&A led to increased debt accumulation by the U.S.
food industry (we observe strong parallel between increased
M&A and an increase in debt in this industry), the increased
agency cost of debt might have nullified many of the efficiency
gains (if any) achieved by this industry via consolidation.
Adjustment of capital to the long-run equilibrium made a
positive contribution to TFP growth, implying that the positive
effect of capital expansion outweighed the installation cost and
debt adjustment cost (to finance capital expansion). Similarly,
technological progress enhanced overall TFP growth in the U.S.
food industry. In fact, most of the growth in TFP came from
technological progress and capital expansion, while scale ef-
fects and the agency cost of debt slowed down TFP growth.
Technological progress alone was the source of slightly over
 F. Hossain et al. / Agricultural Economics 33 (2005) supplement 399–410
1% of TFP growth in this industry. Technological progress and
capital adjustment combined for about 1.4% annual growth in
TFP. The agency cost of debt and scale effects reduced the an-
nual TFP growth by slightly over one half of 1%. Although
TFP growth benefited from the signaling benefit of dividend
payment, this benefit was far outweighed by the negative effect
of agency cost of debt. Overall, increased reliance on debt fi-
nancing during the last four decades considerably reduced the
pace of productivity growth in the aggregate U.S. food manu-
facturing industry.
5. Conclusion
This study analyzed the interdependence between the finan-
cial structure (i.e., debt–equity mix) and productivity perfor-
mance in the U.S. food manufacturing industry. In particular,
we estimated the impact of the agency cost of debt and the
signaling benefit of dividend payments on output supply, input
demand, profitability, and productivity growth in the aggregate
food industry. The results suggest that changes in the finan-
cial structure of this industry significantly affected its produc-
tion and performance during the period covered by this study.
Specifically, the agency cost associated with increased debt use
by this industry adversely affected its output, input demand,
profitability, and productivity growth. On the other hand, the
signaling benefit associated with dividend payment positively
contributed to the production and performance of this industry.
However, the positive effects of dividend payment (via signal-
ing benefit) on the production and performance of this industry
were relatively small in magnitude. For the aggregate U.S. food
industry, the positive effects of dividend payment are more than
offset by the negative effects of agency cost that resulted from
the observed rapid increase in debt financing by this industry.
Overall, the U.S. food manufacturing industry experienced
a 0.89% annual growth in TFP. Technological progress and
capital adjustment were the principal sources of this growth,
while scale effects and the agency cost of debt reduced its
pace. Increased debt use by the U.S. food industry reduced the
annual productivity growth in this industry by 0.17%, which
was about 19% of the observed TFP growth. On the other
hand, the signaling benefit of dividend payment accounted for
about 8% of the TFP growth in this industry. Capital expansion
seems to have had the greatest impacts on output supply, input
demand, profitability, and productivity growth in the U.S. food
manufacturing industry.
The results of this study suggest that there is very little po-
tential for significant cost savings via scale economies in the
U.S. food industry. This implies that the mergers and acquisi-
tions (M&A) in this sector are unlikely to bring substantial cost
savings. To the extent that debt was used to finance M&A , the
agency cost of increased debt might have nullified the efficiency
gains (if any) achieved by the industry from past consolidation.
This study demonstrates that analysis that integrates
firms’ production and financial decisions provides a better
409
understanding of production and performance than analysis that
includes only real variables. Our analysis is based on aggregate
industry data, and as such it is unable to uncover potential vari-
ations in performance across disaggregated industries. It is pos-
sible that financial structure changes had differential impacts on
the productivity performances of disaggregated industries and
individual companies of different sizes, impacts that could be
the topic of future research.
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