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The Effects of Uncertainty and Capital Source on Cooperative Firm Leverage

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  • McKee, Gregory
  • Larsen, Ryan

Abstract

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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    File URL: http://ageconsearch.umn.edu/record/249595/files/06%20The%20Effects%20of%20Uncertainty%20and%20Capital%20Source%20on%20Cooperative%20Firm%20Leverage.pdf
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    References listed on IDEAS

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    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.
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    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.
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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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    Keywords

    Agribusiness;

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