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1 – 10 of over 4000Jeffrey Royer and Gregory McKee
This paper presents a model for determining the optimal capital structure for cooperatives and explores the relationship between financial leverage and the ability of cooperatives…
Abstract
Purpose
This paper presents a model for determining the optimal capital structure for cooperatives and explores the relationship between financial leverage and the ability of cooperatives to retire member equity.
Design/methodology/approach
A model is developed to determine the optimal capital structure and explore the relationship between capital structure and the rate at which a cooperative can retire member equity. Using data from cooperative financial statements, ordinary least-squares regressions are conducted to test two hypotheses on capital structure and equity retirement.
Findings
The model shows that the optimal capital structure is determined by the ratio of the rate of return on capital employed to the interest rate on borrowed capital and the required level of interest coverage. The regressions suggest that cooperatives choose their capital structure largely according to the rate of return on capital employed and the interest rate in a manner consistent with maximizing the rate of return on equity and that the rate at which cooperatives can retire member equity is directly related to leverage.
Research limitations/implications
The model does not consider unallocated earnings. Analysis of the relationship between leverage and equity retirement yields results contrary to the assumptions of earlier studies.
Practical implications
Cooperatives can use the model because the necessary parameters are easily understood and readily available from financial statements, lenders and industry sources.
Originality/value
The model is developed specifically for determining the capital structure of cooperatives and differs substantially from the corporate model. A theoretical basis is provided for the relationship between leverage and equity retirement.
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Donald Haurin and Stephanie Moulton
This paper links the literatures on the life-cycle hypothesis, homeownership, home equity and pensions. Empirically, the focus is on the EU and USA. The paper aims to explore the…
Abstract
Purpose
This paper links the literatures on the life-cycle hypothesis, homeownership, home equity and pensions. Empirically, the focus is on the EU and USA. The paper aims to explore the extent that seniors extract their home equity and discuss the financial instruments available for equity extraction.
Design/methodology/approach
The study uses data from the EU and USA to determine homeownership rates, house values and mortgage debt. With these values, the amount of seniors’ home equity is measured for each country. The usage of home equity extraction methods is reported and factors limiting their use are identified.
Findings
Seniors’ home equity is a substantial share of their total wealth. Estimates for 2013 are that their home equity equals about €5tn in the USA and over €8tn in large EU countries. The authors find that only a small share of seniors extracts their home equity. While there are supply side constraints in many countries, the evidence suggests that the cause of low extraction rates is the lack of demand. Various reasons for the lack of demand are discussed.
Practical implications
The increasing share of seniors in most countries’ population suggests that there will be increasing pressure on public pension systems. One among many options to address this issue is to impose a wealth test for eligibility, where wealth includes home equity. This study suggests that although home equity is substantial for many seniors, they are reluctant to access the funds.
Originality/value
The paper highlights the importance of home equity in the EU and USA and the factors that affect the primary methods of extraction.
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The purpose of this paper is to describe an equity management and planning tool used by rural electric cooperatives (RECs) and based on the times-interest-earned ratio (TIER). The…
Abstract
Purpose
The purpose of this paper is to describe an equity management and planning tool used by rural electric cooperatives (RECs) and based on the times-interest-earned ratio (TIER). The objectives of the paper are to construct a mathematical model that provides a rigorous foundation for the TIER approach, modify the approach so the rate of return on equity is a function of the cooperative’s equity position, demonstrate how elements of the model can be used by RECs in setting electric rates that will enable them to accelerate the retirement of member equity, and derive a generalized form of the “modified Goodwin formula” that can be used by both RECs and agricultural cooperatives.
Design/methodology/approach
Mathematical and graphical expressions of the TIER approach are developed. Simulations are used to demonstrate how RECs can set electric rates according to a target revolving period. The modified Goodwin formula is generalized to include the payment of cash patronage refunds through use of a growth model of an agricultural cooperative developed in Royer (1993).
Findings
This paper demonstrates how TIER analysis and the modified Goodwin formula can be used by cooperatives to aid their decisions regarding debt and equity financing and their choices regarding cash patronage refunds, equity retirement, and growth. The paper demonstrates that cooperatives that fail to recognize the functional relationship between the rate of return on equity and the equity position may substantially underestimate the equity position necessary to meet interest coverage requirements and overestimate their ability to grow and retire equity. It also shows that RECs may be able to make substantial improvements in equity revolvement with only modest increases in electric rates.
Research limitations/implications
The model developed in this paper has been simplified to focus on fundamental financial relationships. To apply this model, cooperatives may need to modify it to accommodate the complexities of their business operations.
Practical implications
TIER analysis can provide a useful equity management and planning tool for both RECs and agricultural cooperatives. It also can be used by lending institutions to assess the financial health of individual cooperative organizations.
Originality/value
Constructing a mathematical model that provides a foundation for TIER analysis, modifying the approach so that the rate of return on equity is a function of the equity position, demonstrating how RECs can use the model to set electric rates according to a target revolving period, and generalizing the modified Goodwin formula so it can be used by agricultural cooperatives are all original contributions.
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Gaurav S. Chauhan and Pradip Banerjee
Recent papers on target capital structure show that debt ratio seems to vary widely in space and time, implying that the functional specifications of target debt ratios are of…
Abstract
Purpose
Recent papers on target capital structure show that debt ratio seems to vary widely in space and time, implying that the functional specifications of target debt ratios are of little empirical use. Further, target behavior cannot be adjudged correctly using debt ratios, as they could revert due to mechanical reasons. The purpose of this paper is to develop an alternative testing strategy to test the target capital structure.
Design/methodology/approach
The authors make use of a major “shock” to the debt ratios as an event and think of a subsequent reversion as a movement toward a mean or target debt ratio. By doing this, the authors no longer need to identify target debt ratios as a function of firm-specific variables or any other rigid functional form.
Findings
Similar to the broad empirical evidence in developed economies, there is no perceptible and systematic mean reversion by Indian firms. However, unlike developed countries, proportionate usage of debt to finance firms’ marginal financing deficits is extensive; equity is used rather sparingly.
Research limitations/implications
The trade-off theory could be convincingly refuted at least for the emerging market of India. The paper here stimulated further research on finding reasons for specific financing behavior of emerging market firms.
Practical implications
The results show that the firms’ financing choices are not only depending on their own firm’s specific variables but also on the financial markets in which they operate.
Originality/value
This study attempts to assess mean reversion in debt ratios in a unique but reassuring manner. The results are confirmed by extensive calibration of the testing strategy using simulated data sets.
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Bryan Foltice and Rachel Rogers
This paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions.
Abstract
Purpose
This paper evaluates potential methods for reducing ambiguity surrounding returns on equity to improve long-term savings decisions.
Design/methodology/approach
We evaluate 221 undergraduate students in the US and first assess the degree of ambiguity aversion exhibited by individuals in the sample population as they decide between a risky (known probability) option and ambiguous (unknown probability) option pertaining to their chances of winning $0 or $1 in a hypothetical lottery. Similarly, we test whether sampling historical return data through learning modules influences long-term decision making regarding asset allocation within a retirement portfolio.
Findings
Allowing participants to experience the underlying probability through sampling significantly influences behavior, as participants were more likely to select the ambiguous option after sampling. Here, we also find that participants who receive interactive learning modules – which require users to manually alter the asset allocation to produce a sample of historical return data based on the specific allocation entered in the model – increase their post-learning equity allocations by 10.1% more than individuals receiving static modules. Interestingly, we find no significant evidence of ambiguity aversion playing a role in the asset allocation decision.
Originality/value
We find that decision-making related to ambiguous and risky options can be substantially influenced by experiential learning. Our study supplements previous literature, providing a link between research on the effect of ambiguity on stock market participation and implementation of educational programs to improve the asset allocation decision for young adults.
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The mainstream framework for corporate governance is that all corporate activity should be directed towards shareholder wealth maximization. This article posits that public policy…
Abstract
Purpose
The mainstream framework for corporate governance is that all corporate activity should be directed towards shareholder wealth maximization. This article posits that public policy should move away from shareholder primacy and instead recognize employees as key contributors to corporate value-creation. One way to implement this approach is to require the creation of Employee Equity Funds (EEFs) at large corporations, which would pay employees dividends alongside external shareholders and establish a collective employee voice in corporate governance. EEFs may reduce economic inequality while improving firm performance and macroeconomic stability. This article provides an original estimate of average employee dividends, illustrating the potential of employee equity funds.
Design/methodology/approach
Analysis of employee dividends for Employee Equity Funds at large U.S. corporations, using publicly available corporate finance data.
Findings
Based on historic dividend payments and employee counts in public 10-K filings, I find that, if EEFs held 20% of outstanding equity, the average employee dividend across this sample would be $2,622 per year, while the median is $1,760. This indicates that employee dividends can be a small but meaningful form of redressing wealth inequality for the low-wage workforce, though it should emphatically not be seen as a replacement for fair wages.
Originality/value
Original data analysis of a proposed policy reform to increase the benefits of employee equity in the United States.
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The purpose of this paper is to explain how the current “crisis” in the UK pension system arose. I argue that it is a result of a combination of changes in government policy and…
Abstract
The purpose of this paper is to explain how the current “crisis” in the UK pension system arose. I argue that it is a result of a combination of changes in government policy and basic instabilities always inherent in the financial system. Policy changes increased the vulnerability of the pension system to those instabilities. The background to these changes and also the frame of reference in terms of which the “crisis” itself is now phrased is broadly neoliberal. Its theoretical roots are in ideas of the efficiency of free markets. Its policy roots are expressed in a series of similar neoliberal policy tendencies in other capitalist states. I further argue that neoliberal solutions to the pension crisis simply offer more of the very matters that created the problems in the first place. Moreover, the very terms of debate, based in markets, financialisation of saving and individualisation of risk, disguise a more basic debate about providing a living retirement income for all. This is a debate that New Labour is simply not prepared to constructively engage with in any concrete fashion.
M.A.P.M. van Asseldonk, H.B. van der Veen and H.A.B. van der Meulen
In self‐directed retirement plans, farmers are responsible for selecting the types of risky investments toward which the funds in their retirement plan are allocated. Furthermore…
Abstract
Purpose
In self‐directed retirement plans, farmers are responsible for selecting the types of risky investments toward which the funds in their retirement plan are allocated. Furthermore, farmers do not necessarily purchase sufficient annuities with their savings upon retirement. There is little empirical evidence on the level of income sought or obtained. The purpose of this study is to analyze the long‐term investment behavior with respect to retirement planning.
Design/methodology/approach
Two types of data were merged for the analysis: data from the Farm Accountancy Data Network (FADN) cross‐sectional dataset, and subjective data collected by a questionnaire survey. A response rate of 39 percent was achieved enabling analysis of 440 farm records. By means of regression analysis, the impact of subjective elements, for example level of income sought, as well as farm structure and financial farm characteristics on income obtained at the time of retirement were revealed.
Findings
By decomposing the underlying decision alternatives, it was shown that the long‐term investment behavior differed substantially among farmers, but the alternative decisions made were hardly affected by structural and objective parameters. The current study reveals the dilemma faced by any farmer who has the option to invest in his own business. Off‐farm retirement investments simply provide an alternative destination for investible funds and it is a rational decision to invest these funds in their own business, thus making the farm itself their retirement “nest‐egg”. However, a discrepancy between the level of income sought and obtained was found.
Research limitations/implications
There is a need to study how farmers can be encouraged to use existing options for obtaining a more comprehensive retirement plan.
Practical implications
In the investigated case, farmers are entitled like all residents to receive retirement benefits provided by the state, referred to as state pension. The use of three alternative retirement plans complementing the state‐sponsored retirement benefits is investigated. Perceptions about whether or not the state pension was sufficient to rely on as the sole source of income did not affect participation in a retirement plan. This stresses the importance that the contributions made and assets reserved should be regularly evaluated and reviewed (via, for example, extension or internet tools) to ensure that the available capital will meet the future income sought.
Originality/value
It is a challenge to identify the adequacy to attain retirement readiness by self‐directed investment plans. The strategic choices to be made are complex, while the outcome is risky. In the current study, the long‐term investment behavior with respect to retirement planning is analyzed by decomposing the underlying decision alternatives.
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This paper aims to compare and contrast alternative pension plans in the market place and their status as zakatable wealth or property. These plans differ in terms of who is…
Abstract
Purpose
This paper aims to compare and contrast alternative pension plans in the market place and their status as zakatable wealth or property. These plans differ in terms of who is responsible for providing funds for pension benefit to the retirees upon retirement and who is responsible for bearing investment risk. Whether a pension plan is subject to zakat immediately or upon receipt at retirement depends on immediate accessibility to and ownership of the funds in the account. It makes no difference whether employer and/or the employee is (are) responsible for funding the plan and who bears the investment risk.
Design/methodology/approach
Descriptive and analytical methods were used.
Findings
There is consensus among Muslim jurists and shariah scholars that mandatory retirement plans offered as a part of compensation and benefit package for a job are subject to zakat when money is received upon retirement and non-mandatory plans offered as replacement for or supplement to employer-sponsored plans with voluntary employee participation are subject to zakat in each year of employment.
Originality/value
There is no prior research work in the extant literature examining zakatability of alternative retirement plans offered in the US marketplace. This paper fills this void and provides a comprehensive survey and analysis of all available retirement plans and their treatment with respect to zakat.
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