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Theory and Test on the Corporate Governance of Financial Cooperative Systems: Merger vs. Networks

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  • Martin Desrochers
  • Klaus P. Fischer

Abstract

This paper presents a study of the economic organization of systems of financial cooperatives (FC). The first part presents a theoretical framework rooted in principles of transaction cost economics (TCE) that seeks to explain empirical regularities observable in systems of FC worldwide. The second part is an empirical study that compares X-efficiency between members of the Quebec Desjardins movement (DM) and the United States Credit Union system (USCU), the first organized as a tight network of institutions and the second composed largely by independent institutions with few ties. The fundamental proposition is that networks, are a superior form of governance mechanism (over markets and mergers) for relatively wide and relevant ranges of contractual hazard and size of the institutions. Further, that networks provide substitute, hierarchy based, control mechanisms when size of the institution dilutes internal governance mechanisms, discouraging subgoal pursuits and expense preferences by agents, both occurring in large FC. The theory allows us to generate a set of testable hypothesis of which we highlight three: i) For small FC, differences in efficiency will be relatively small, if any. ii) Large institutions should display systematically lower efficiency than similar sized FC members of strategic networks. iii) Networks should display lower variance in the size as well as in performance indicators. Throughout, empirical results are consistent with our central theoretical proposition.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0334.

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Date of creation: 2003
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Handle: RePEc:lvl:lacicr:0334

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Keywords: Transaction cost economics; financial cooperatives; credit unions; networks; corporate governance; technical efficiency; X-efficiency;

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References

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Citations

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Cited by:
  1. Martin Desrochers & Klaus P. Fischer, 2005. "The Power of Networks: Integration and Financial Cooperative Performance," Cahiers de recherche 0514, CIRPEE.
  2. Marc Labie & Anaïs Périlleux, 2008. "Corporate governance in microfinance: credit unions," Working Papers CEB 08-003.RS, ULB -- Universite Libre de Bruxelles.
  3. Moulin, Bertrand, 2011. "Microfinance investment vehicles in Sub-Saharan Africa: constraints and potentials," MPRA Paper 32967, University Library of Munich, Germany.
  4. Carlos E. Cuevas & Klaus P. Fischer, 2006. "Cooperative Financial Institutions : Issues in Governance, Regulation, and Supervision," World Bank Publications, The World Bank, number 7107, February.

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