Financial constraints in United States agricultural cooperatives: Theory and panel data econometric evidence

This study addresses the issue of financial constraints in agricultural cooperatives. Many scholars suggest financial constraints resulting from restricted residual claims and imperfect access to external sources of finance is the “Achilles' heel” of traditional cooperatives in an increasingly concentrated and tightly coordinated food system. Despite such theoretical claims, the available empirical evidence is not conclusive concerning the cooperative capital constraint hypothesis.; The purpose of this study is to empirically test the cooperative capital constraint hypothesis based on the Q theory of investment. The study applies the Q theory to investigate agricultural cooperative investment behavior making use of a firm-level panel data set. The data set includes annual accounting information of 1,271 U.S. agricultural cooperatives covering the years 1991 through 2000. With the use of panel data econometric techniques, the study examines whether cooperatives' investment is constrained by the availability of internal funds.; Empirical results lend support to the hypothesis that agricultural cooperatives are financially constrained. It is found that both Marginal q and cash flow are statistically significant explanatory variables of cooperative physical capital investment. The fact that cooperative investment is sensitive to cash flow suggests the presence of binding capital constraints in the full cooperative sample. These empirical results are robust across alternative model specifications, panel data construction methods, and econometric techniques.; Additionally, the tests for excess sensitivity of investment to cash flow are extended to three a priori sample splitting criteria used to sort cooperatives into subsamples of “constrained” and “unconstrained” firms. Empirical results suggest that (i) large cooperatives are more financially constrained than small cooperatives; (ii) cooperatives with low amounts of permanent equity capital (PEK) are more financially constrained than high PEK cooperatives; and (iii) cooperatives with high credit risk are more financially constrained than cooperatives with low credit risk. The estimation of the unrestricted investment model for sub-samples of agricultural cooperatives provide further support to the financial constraint interpretation of the role of cash flow in cooperative investment behavior.; The study has relevant implications to both the financial management and organization design of and public policy towards U.S. agricultural cooperatives.