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The Cost of Risky Debt in Cooperatives

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  • Srinivasan, R.

Abstract

This article values the debt of an input cooperative that procures a single commodity from farmers and then processes and markets the output, and an otherwise identical firm structured as an investor-owned firm (IOF) using the Black-Scholes option pricing model. The major conclusion of this article is that a cooperative can be designed to be safer for lenders, which implies a lower cost of debt, than an otherwise identical firm structured as an IOF. This conclusion is a logical consequence of the difference between the residual claims of the owners of cooperatives and of IOFs.

Suggested Citation

  • Srinivasan, R., 2011. "The Cost of Risky Debt in Cooperatives," Journal of Cooperatives, NCERA-210, vol. 25, pages 1-16.
    • Handle: RePEc:ags:jlcoop:164703
    DOI: 10.22004/ag.econ.164703
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    References listed on IDEAS

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    1. Jensen, Michael C & Meckling, William H, 1979. "Rights and Production Functions: An Application to Labor-managed Firms and Codetermination," The Journal of Business, University of Chicago Press, vol. 52(4), pages 469-506, October.
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    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Parliament, Claudia & Lerman, Zvi, 1993. "Risk and Equity in Agricultural Cooperatives," Journal of Agricultural Cooperation, National Council of Farmer Cooperatives, vol. 8, pages 1-14.
    5. Chesnick, David S., 2000. "Financial Management and Ratio Analysis For Cooperative Enterprises," Research Reports 280016, United States Department of Agriculture, Rural Development.
    6. Russo, Carlo & Sabbatini, Massimo, 2005. "Incentives to Efficient Investment Decisions in Agricultural Cooperatives," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24455, European Association of Agricultural Economists.
    7. Moore, Charles V. & Noel, Jay E., 1995. "Valuation of Transferable Delivery Rights for Marketing Cooperatives," Journal of Cooperatives, NCERA-210, vol. 10, pages 1-17.
    8. Sporleder, Thomas L. & Bailey, Michael D., 2001. "Using Real Options To Evaluate Producer Investment In New Generation Cooperatives," 2001 Annual meeting, August 5-8, Chicago, IL 20725, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. R. Srinivasan & S.J. Phansalkar, 2003. "Residual Claims in Co‐operatives: Design Issues," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 74(3), pages 365-396, September.
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    Cited by:

    1. Raboy David G. & Basher Syed Abul & Hossain Ishrat & Kaitibie Simeon, 2013. "More Efficient Production Subsidies for Emerging Agriculture in Arab Micro-States: A Conceptual Model," Review of Middle East Economics and Finance, De Gruyter, vol. 9(3), pages 293-319, December.

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