Investment value on cooperatives as acquisition of property rights: evidence from Brazilian credit union

TOPIC 14 - STAGE 4 - MICRO. Credit unions are nonprofit societies and its ownership is collective, thus its members have only one party of the property rights. They become owners if acquire a share of equity capital. In terms... [ view full abstract ]

TOPIC 14 - STAGE 4 - MICRO.

Credit unions are nonprofit societies and its ownership is collective, thus its members have only one party of the property rights. They become owners if acquire a share of equity capital. In terms of the financial theory, it represents an investment with an immediate cost. For instance, the value paid by share. However, there are benefits also represented as expected future return. The share value might diverge significantly among different co-ops, because it can be related with total of members in the society, organizational structure and characteristics of the property rights. Additionally, member’s perspective of his participation can affect the share value indeed. Like other companies, the share of equity acquisition originates two ownership rights: the control of organization and its free cash flow. According to the theory, in co-ops the property rights are vaguely defined. Then, it may affect the availability of the member to invest on the society. In this paper, we investigate the value paid by members to become owners and the rights they acquired with this investment. Our goal was check out if the equity price was related with the traditional rights of ownership or includes the value of using the company. To reach the goal, we employed the Free Cash Flow Equity Method estimation in order to estimate the value of credit union for owners, if the co-op were sold, adopting the methods of two and three stages, in parallel. We calculate the value per member by the ratio of the valuation value by the membership. This value was compared with price of the share for new members become owners. The sample includes Brazilian credit union of the state of São Paulo using financial information of 2006 to 2014. Both methods of stages showed that the value of the investment done on the cooperatives is statistically smaller than the acquired properties value resultant of valuation. Our findings show that the equity investment can correspond not to all properties rights referred by the equity shares. Apparently, the control right in these organizations is not the main purpose to become an owner, thus these individuals can become members aiming to use the cooperatives when this negotiation is beneficial, in other words, the use option application.