Valuing intangible capital in agribusinesses: a re-examination of the neoclassical theory of investment

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Purpose This study investigates how agribusinesses' investment rates in physical and intangible capital respond to changes in investment opportunities and examines how their financial health affects these investment decisions. Despite the growing importance of intangible assets in agriculture, research on agribusinesses' investment behavior in these assets remains limited. Design/methodology/approach Using financial data from U.S. publicly listed agribusinesses from 1975–2024, we employ higher-order cumulant estimators to address measurement error problems in proxies for investment opportunities, such as Tobin's q and Total q. We conduct regression analyses to evaluate investment rate sensitivities across physical and intangible capital along with financial condition, using the Altman Z-score to classify firms as financially distressed or healthy. Findings Investment rates in intangible capital are less responsive to changes in investment opportunities than those for physical capital. Second, when financial condition is considered, financially distressed firms' investment rates in physical capital exhibit lesser sensitivity to changes in investment opportunities compared to investments in intangible capital. We also find that financially healthy firms’ investment rates in physical capital show greater sensitivity to changes in investment opportunities compared to financially distressed firms, while the opposite is true for investments in intangible capital. Lastly, we find that including the cash flow variable does not signal the presence of financial constraints under the investment-q framework. Research limitations/implications A limitation of this study is that the investment-q theory posits that q explains investment behavior. The omission of additional determinants of investment may bias our results. Second, our study revealed a significant role for firm financial condition on the sensitivity of investment rates to investment opportunities. Firms that are financially distressed are more likely to have lower market values relative to the book value of their capital stock and consequently a lower total q-value. However, a lower total q does not always map directly to a lower investment rate. Practical implications For financially distressed agribusinesses, our findings suggest they should focus on improving their financial position before pursuing new investment opportunities. Specifically, these firms should prioritize paying down debt to reduce leverage and improving profitability to better position themselves to take advantage of investment opportunities. Additionally, given their growing importance in maintaining a competitive advantage, agribusinesses may benefit from frameworks that better evaluate intangible investments. Originality/value We extend the investment-q framework by examining how financial health affects investment behavior across capital types in agribusinesses. Unlike previous studies that use cash flow to signal the presence of financial constraints, we employ the Altman Z-score as a comprehensive measure of firm financial condition, providing clearer differentiation between financially distressed and healthy firms.