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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. 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.
    6. Chesnick, David S., 2000. "Financial Management and Ratio Analysis For Cooperative Enterprises," Research Reports 280016, United States Department of Agriculture, Rural Development.
    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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