Which Cooperative Ownership Model Performs Better? A Financial-Decision Aid Approach

In this article the financial/ownership structures of agribusiness cooperatives are analyzed to examine whether new cooperative models perform better than the more traditional ones. The assessment procedure introduces a new financial decision-aid approach, which is based on data-analysis techniques in combination with a preference ranking organization method of enrichment evaluations (PROMETHEE II). The application of this multicriteria decision-aid approach allows the rank ordering of cooperatives based on the most prominent financial ratios. The financial ratios were selected using principal component analysis. This analytical procedure reduces the dimensionality of large numbers of interrelated financial performance measures. We assess the financial success of Dutch agribusiness cooperatives for the period 1999-2010. Results show that there is no clear-cut evidence that cooperative models used to attract extra members' investments and/or outside equity perform better than the more traditional models. This suggests that ownership structure of cooperatives is not always a decisive factor for their financial success. [EconLit citations: Q130, G320, C440].

Introduction

Cooperatives have long-been criticized for their inefficient decision-making process and their capital constraints (e.g., Cook, 1995; Karantininis & Nilsson, 2007). The latter occurs because agribusiness cooperatives have traditionally adhered to exclusive members' ownership in the form of direct investments or retained patronage refunds (Barton, 1989; Knoeber & Baumer, 1989). However, many cooperatives, to successfully adapt to the industrialization of agricultural and food markets, relaxed their traditional finance principle (Cook & Chaddad, 2004). The extent to which cooperatives relax this definitional principle influences their ownership/financial structure, ranging from a traditional (collective) to a more individualized, IOF-like (investor-owned firm) structure (Benos, Kalogeras, Verhees, & Pennings,2009; Kalogeras et al., 2007). That is, numerous cooperatives in the US and EU allow for individualized equity shares, invite nonmember parties to partially finance their operations, and publicly list parts of their equity stock (Bijman & van Bekkum, 2005; Kalogeras, Pennings, van der Lans, Garcia, & van Dijk, 2009). A question that arises is whether the individualization of the ownership structure is driving the financial performance, that is, whether the cooperative's ownership structure is a decisive determinant of success.

In the literature on the performance of cooperatives and IOFs, two main approaches have been proposed. The first is the neoclassical approach, which deals with the efficiency of the two organizational forms, and consequently the influence on their functioning in the marketplace (e.g., Fulton & Giannakas, 2001; Notta & Vlachvei, 2007). The second approach compares the financial ratios of cooperatives and IOFs (e.g., Gentzoglanis, 1997; Harris & Fulton, 1996). The identification of differences in ratios allows for a comparison of the financial performance of both organizational forms. These studies often emphasize the superiority in terms of financial performance of the IOF-like models. However, agribusiness cooperatives experienced an inherently dynamic restructuring process (Kalogeras et al., 2009), and to adapt to agricultural industrialization (Chaddad & Cook, 2004) have increasingly been involved in value-adding processing, branding and market-oriented activities and strategies (Benos et al., 2009). Hence, new cooperative models have emerged that relaxed their financial equity constraints by attracting extra members' investments and/or outside equity (Chaddad & Cook, 2004; van Bekkum & Bijman, 2006). As a consequence, property, ownership, and residual claim rights are redistributed in the intraorganizational cooperative environment (Iliopoulos, 1998). The new models vary between the polar forms of the traditional cooperative model and the IOF-like model.

The objective of this article is to assess the financial performance of agribusiness cooperative models with different ownership characteristics, i.e., traditionally organized, member-investor, and publicly listed cooperatives. To the best of our knowledge, this is the first empirical study that compares the financial performance of agribusiness cooperative models with different equity structures. Further, this study expands the current literature (e.g., Baourakis, Doumpos, Kalogeras, & Zopounidis, 2002; Bijman & van Bekkum, 2005) on country-specific cooperative performance. We evaluate the performance of selected agribusiness cooperative models established and operating in The Netherlands. More specifically, we investigate which specific models perform better than others. This allows insights into how the organizational reform of cooperatives is linked to their financial viability. Nilsson and Gunnarsson (2000) argued that the turnover of Irish cooperatives that acquired equity capital from the Dublin Stock Exchange increased significantly. In addition, Bijman and van Bekkum (2005) provide similar insights for the Dutch agribusiness cooperatives based on descriptive case-study results.

To address our objective, we apply a newly developed multicriteria decision-aid methodological framework. This framework provides a ranking of the selected cooperative models based on their financial performance. Particularly, it provides insights on how cooperatives outrank their peers, and hence whether newly emerged cooperative models have contributed to this. These results show that there is no clear-cut evidence supporting the premise that the more IOF-like cooperative models perform better than the more traditional ones.

The remainder of this article is structured as follows. In section 'THEORETICAL BACKGROUND', we briefly discuss relevant theoretical foundations. The decision context is presented in section 'DECISION CONTEXT', and section 'MODELING FRAMEWORK' we describe the specifications of our modeling framework. In section 'EMPIRICAL ANALYSIS AND RESULTS' we present the results; in section'CONCLUSIONS' conclusions are drawn and research challenges are mentioned.

Research Topics: Project Financing Structured Finance Financial Risk Management Competition and Financial Strategy

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Which Cooperative Ownership Model Performs Better? A Financial-Decision Aid Approach

Introduction

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