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The Effects of Uncertainty and Capital Source on Cooperative Firm Leverage


  • McKee, Gregory
  • Larsen, Ryan


The organizational structure of cooperatives generates a complex link between member equity and overall corporate capital structure. This link is further complicated by macroeconomic and firm-based risks. This paper presents a model of optimal debt ratio, subject to cooperative financial characteristics and capital requirements. We test the proposition that macroeconomic and idiosyncratic uncertainty tend to decrease the optimal debt to total asset ratio. We find that macroeconomic and idiosyncratic risk negatively affect optimal borrowing in cooperatives with sales of $25 million or less. Conversely, no clear relationship exists between these types of risk and cooperatives with greater sales. These findings suggest an important relationship between firm operations and member equity as small cooperatives contemplate entry into world markets.

Suggested Citation

  • McKee, Gregory & Larsen, Ryan, 2012. "The Effects of Uncertainty and Capital Source on Cooperative Firm Leverage," Journal of Rural Cooperation, Hebrew University, Center for Agricultural Economic Research, vol. 40(2), pages 1-18.
  • Handle: RePEc:ags:jlorco:249595
    DOI: 10.22004/ag.econ.249595

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    References listed on IDEAS

    1. Jeff Corman & Murray Fulton, 1990. "Patronage Allocation, Growth and Member Weil-Being in Co-operatives," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 38(1), pages 45-66, March.
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    3. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    4. Royer, Jeffrey S. & Smith, Darnell B., 2007. "Patronage Refunds, Producer Expectations and Optimal Pricing by Agricultural Cooperatives," Journal of Cooperatives, NCERA-210, vol. 20, pages 1-18.
    5. Junge, Katie A. & Ginder, Roger, 1986. "Effects of Federal Taxes on Member Cash Flow Patronage Refunds," Staff General Research Papers Archive 11479, Iowa State University, Department of Economics.
    6. Eversull, E. Eldon, 2010. "Cooperative Equity Redemption," Research Reports 280108, United States Department of Agriculture, Rural Development.
    7. Royer, Jeffrey S. & Shihipar, M.L. Mohamad, 1997. "Individual Patron Preferences, Collective Choice, and Cooperative Equity Revolvement Practices," Journal of Cooperatives, NCERA-210, vol. 12, pages 1-16.
    8. James G. Beierlein & Lee F. Schrader, 1978. "Patron Valuation of a Farmer Cooperative under Alternative Finance Policies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 60(4), pages 636-641.
    9. Junge, Katie A. & Ginder, Roger G., 1986. "Effects of Federal Taxes on Member Cash Flows From Patronage Refunds," Journal of Agricultural Cooperation, National Council of Farmer Cooperatives, vol. 1, pages 1-16.
    10. Christopher F. Baum & Andreas Stephan & Oleksandr Talavera, 2009. "The Effects Of Uncertainty On The Leverage Of Nonfinancial Firms," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 216-225, April.
    11. Jing Liu & Doron Nissim & Jacob Thomas, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, March.
    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. D. Lynn Forster, 1996. "Capital structure, business risk, and investor returns for agribusinesses," Agribusiness, John Wiley & Sons, Ltd., vol. 12(5), pages 429-442.
    14. John J. VanSickle & W. Ladd George, 1983. "A Model of Cooperative Finance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 65(2), pages 273-281.
    15. Barton, David G. & Parcell, Joseph L. & Featherstone, Allen M., 1997. "Optimal Capital Structure in Centralized Agricultural Cooperatives," 1997 Annual Meeting, July 13-16, 1997, Reno\ Sparks, Nevada 35809, Western Agricultural Economics Association.
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    Cited by:

    1. Theo Benos & Nikos Kalogeras & Martin Wetzels & Ko De Ruyter & Joost M. E. Pennings, 2018. "Harnessing a ‘Currency Matrix’ for Performance Measurement in Cooperatives: A Multi-Phased Study," Sustainability, MDPI, Open Access Journal, vol. 10(12), pages 1-38, December.
    2. Jasper GRASHUIS & Ye SU, 2019. "A Review Of The Empirical Literature On Farmer Cooperatives: Performance, Ownership And Governance, Finance, And Member Attitude," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 90(1), pages 77-102, March.

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