Investor'S Expectations Of New Generation Cooperatives' Equity
New Generation Cooperatives (NGCs) or value-added agricultural cooperatives are undergoing several structural changes with the acceptance of outside (non-farmer) investor equity and demutualization or transformation into investor-oriented ownership firms (e.g., Limited Liabilities Cooperatives (LLCs) to ameliorate perceived financial constraints for high technology investments. These changes introduced added complexity to investors' expectations of equity and to the valuation of NGC and LLC stocks, especially for stock traded among members. Current stock valuation methods do not capture NGC-specific characteristics such as social capital, liquidity constraints, and ongoing demutualization to LLCs. Social capital is the premium paid for non-monetary benefits available to NGC members such as crop quality control. Liquidity is important because NGC stocks have low trading volumes. The objective of this study is to use publicly available data of stock traded between NGC and LLC investors to evaluate investors' expectations of changes in growth and social capital and derive implications on the firm. The data set used comprised of 565 observations for NGCs for the period from 1996 to 2004, 175 observations for LLCs for the period from 2003 to 2004, and 127 observations for NGCs that transformed into LLCs, for the period from 1997 to 2004. A two-step linear regression model using earnings price ratio and the realized rate of return as the dependent variables, and risk, liquidity, social capital, and expectation of change in growth as the independent variables, was used for the analysis. In the first step, we estimate NGC and LLC earnings price ratios, and we derive investors' expectations of changes in earnings growth. In the second step, we analyze the impact of systematic risk, social capital, liquidity, expectations of changes in growth and seasonality on NGC and LLC realized returns. The results suggest that non-systematic risk factors (size, dividend, leverage, and earnings variability) are important determinants of NGC and LLC equity or earnings price ratio and that systematic risk negatively impacts NGC and LLC realized returns. In addition, social capital positively affects NGC and LLC earnings price ratio, but has no significant effect on NGC and LLC realized returns. Liquidity affects LLC earnings price ratio at the 10% significance level. The findings reveal that investors have negative expectations (higher future stock values) about NGC future earnings growth at the 1% significance level but there is no significant expectation effect on LLC realized returns. NGCs and LLCs managers could maintain low-risk investments and increase social capital services to build loyalty among current investors and attract additional infusion of equity capital from outside investors.
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