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The agency cost of ownership and governance adaptations in farm producer organizations

The agency cost of ownership and governance adaptations in farm producer organizations Many farm producer organizations pursue growth and complexity in response to price volatility, industry consolidation and other external developments. Consequently, as ownership is dispersed and control is delegated, members may face increasing agency cost. In spite of the potential to impact performance and even survival, empirical attention to agency problems in farm producer organizations is limited. The purpose of this paper is to address the gap in the literature with an empirical study.Design/methodology/approachWith survey responses from 365 farm producer organizations in the USA, the author uses a two-limit tobit model to estimate the relationships of six ownership and governance characteristics (i.e. board size, management size, director independence, manager independence, CEO independence and non-member ownership) to agency cost, which is proxied by the operating expense ratio.FindingsWhile controlling for heterogeneity in scale and technology, the author finds positive relationships of board size, management size and CEO independence to agency cost. The novel result illustrates there is a significant cost to the adoption of non-traditional ownership and governance characteristics by farm producer organizations.Practical implicationsThe presence of agency cost serves as motivation to farm producer organizations to implement new or adapt old agency mechanisms. One recommendation is to reconsider the payment structure of non-member CEOs. There may not be enough incentive to inspire an upstream bias, which is perhaps possible by linking CEO performance to price, patronage and member-oriented performance measurements.Originality/valueAgency cost is rarely studied in relation to farm producer organizations. Recent contributions in the empirical literature lacked an explicit connection of ownership and governance characteristics to agency cost. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

The agency cost of ownership and governance adaptations in farm producer organizations

Agricultural Finance Review , Volume 80 (2): 12 – Mar 20, 2020

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References (36)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0002-1466
DOI
10.1108/afr-07-2019-0079
Publisher site
See Article on Publisher Site

Abstract

Many farm producer organizations pursue growth and complexity in response to price volatility, industry consolidation and other external developments. Consequently, as ownership is dispersed and control is delegated, members may face increasing agency cost. In spite of the potential to impact performance and even survival, empirical attention to agency problems in farm producer organizations is limited. The purpose of this paper is to address the gap in the literature with an empirical study.Design/methodology/approachWith survey responses from 365 farm producer organizations in the USA, the author uses a two-limit tobit model to estimate the relationships of six ownership and governance characteristics (i.e. board size, management size, director independence, manager independence, CEO independence and non-member ownership) to agency cost, which is proxied by the operating expense ratio.FindingsWhile controlling for heterogeneity in scale and technology, the author finds positive relationships of board size, management size and CEO independence to agency cost. The novel result illustrates there is a significant cost to the adoption of non-traditional ownership and governance characteristics by farm producer organizations.Practical implicationsThe presence of agency cost serves as motivation to farm producer organizations to implement new or adapt old agency mechanisms. One recommendation is to reconsider the payment structure of non-member CEOs. There may not be enough incentive to inspire an upstream bias, which is perhaps possible by linking CEO performance to price, patronage and member-oriented performance measurements.Originality/valueAgency cost is rarely studied in relation to farm producer organizations. Recent contributions in the empirical literature lacked an explicit connection of ownership and governance characteristics to agency cost.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: Mar 20, 2020

Keywords: Corporate governance; Agency cost; Ownership cost; D22; D71; Q13

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