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Strategic options associated with cooperative members' equity

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Author Info

  • Gabriel J. Power
  • Victoria Salin
  • John L. Park

Abstract

Purpose – Building on the property rights framework, the purpose of this paper is to frame the cooperative business model in terms of strategic options held either by the board or by members. Options that are analyzed include growth and restructuring, dividend allocation, member entry and exit, and member embedded value options. Design/methodology/approach – Empirical estimates of the options' financial value, as well as sensitivity analyses, are presented for a stylized example using historical data and Monte Carlo option-pricing methods. Attention is paid to the effect of member age, discount rate and business operation size. Findings – Results suggest that the board's growth options can be substantial, while member options generally have small but nontrivial value. Implications for the stability of membership are drawn. Practical implications – The financial or economic value of strategic options in agricultural cooperatives can be significant, and decision makers may benefit from accounting for their presence. Originality/value – Cooperatives play an important role in agribusiness but have undergone significant changes in the past two decades in terms of organizational and financial structure. This paper contributes to an understanding of the value of control and residual rights associated with the Board and members of cooperatives. JEL classification: G32, Q14

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

Volume (Year): 72 (2012)
Issue (Month): 1 (March)
Pages: 48-67

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Handle: RePEc:eme:afrpps:v:72:y:2011:i:1:p:48-67

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Related research

Keywords: Agricultural finance; Capital constraints; Cooperatives; Equity capital; Governance; Property rights; Strategic options;

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References

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  1. Fabio R. Chaddad & Michael L. Cook & Thomas Heckelei, 2005. "Testing for the Presence of Financial Constraints in US Agricultural Cooperatives: An Investment Behaviour Approach," Journal of Agricultural Economics, Wiley Blackwell, vol. 56(3), pages 385-397.
  2. Bruce Kogut, 1991. "Joint Ventures and the Option to Expand and Acquire," Management Science, INFORMS, vol. 37(1), pages 19-33, January.
  3. Cook, Michael L. & Plunkett, Brad, 2006. "Collective Entrepreneurship: An Emerging Phenomenon in Producer-Owned Organizations," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 38(02), August.
  4. Paula Cabo & Joao Rebelo, 2005. "Why do Agricultural Credit Cooperatives Merge? The Portuguese Experience," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 76(3), pages 491-516, 09.
  5. Kenkel, Philip L. & Park, John L., 2007. "Business Models and Producer-Owned Ventures: Choices, Challenges, and Changes," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 39(02), August.
  6. Child, John & Faulkner, David & Tallman, Stephen, 2005. "Cooperative Strategy: Managing Alliances, Networks, and Joint Ventures," OUP Catalogue, Oxford University Press, edition 2, number 9780199266258.
  7. Richards, Timothy J. & Manfredo, Mark R., 2001. "Post Merger Performance of Agricultural Cooperatives," 2001 Annual meeting, August 5-8, Chicago, IL 20531, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. Fabio R. Chaddad & Michael L. Cook, 2004. "Understanding New Cooperative Models: An Ownership–Control Rights Typology," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 26(3), pages 348-360.
  9. Michael L. Cook & Fabio R. Chaddad, 2004. "Redesigning Cooperative Boundaries: The Emergence of New Models," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1249-1253.
  10. Getu Hailu & Scott R. Jeffrey & Ellen W. Goddard, 2007. "Capital structure, firm size, and efficiency: the case of farm petroleum and animal feed co-operatives in Canada," Agricultural Finance Review, Emerald Group Publishing, vol. 67(2), pages 279-293, September.
  11. Fabio R. Chaddad & Michael L. Cook, 2004. "The Economics of Organization Structure Changes: a US perspective on demutualization," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 75(4), pages 575-594, December.
  12. Brent Hueth & Philippe Marcoul, 2009. "Incentive Pay for CEOs in Cooperative Firms," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1218-1223.
  13. Robin Cross & Steven Buccola, 2004. "Adapting Cooperative Structure to the New Global Environment," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1254-1261.
  14. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
  15. Michael E. Sykuta & Michael L. Cook, 2001. "A New Institutional Economics Approach to Contracts and Cooperatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(5), pages 1273-1279.
  16. Abigail M. Hind, 1997. "The Changing Values of the Cooperative and Its Business Focus," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1077-1082.
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