Strategic options associated with cooperative members' equity

Gabriel J. Power, Victoria Salin and John L. Park

Agricultural Finance Review, 2012, vol. 72, issue 1, pages 48-67

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

Keywords: Agricultural finance; Capital constraints; Cooperatives; Equity capital; Governance; Property rights; Strategic options (search for similar items in EconPapers)
Date: 2012
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