Theory and Test on the Corporate Governance of Financial Cooperative Systems: Merger vs. Networks

CIRPEE Working Paper No. 03-34

37 Pages Posted: 22 Oct 2003

See all articles by Martin Desrochers

Martin Desrochers

Developpement International Desjardins

Klaus P. Fischer

affiliation not provided to SSRN

Date Written: September 2003

Abstract

This paper presents a study of the economic organization of systems of financial cooperatives (FC). The first part presents a theoretical framework rooted in principles of transaction cost economics (TCE) that seeks to explain empirical regularities observable in systems of FC worldwide. The second part is an empirical study that compares X-efficiency between members of the Quebec Desjardins movement (DM) and the United States Credit Union system (USCU), the first organized as a tight network of institutions and the second composed largely by independent institutions with few ties. The fundamental proposition is that networks are a superior form of governance mechanism (over markets and mergers) for relatively wide and relevant ranges of contractual hazard and size of the institutions. Further, that networks provide substitute, hierarchy based, control mechanisms when size of the institution dilutes internal governance mechanisms, discouraging subgoal pursuits and expense preferences by agents, both occurring in large FC. The theory allows us to generate a set of testable hypothesis of which we highlight three: i) For small FC, differences in efficiency will be relatively small, if any. ii) Large institutions should display systematically lower efficiency than similar sized FC members of strategic networks. iii) Networks should display lower variance in the size as well as in performance indicators. Throughout, empirical results are consistent with our central theoretical proposition.

Keywords: Transaction cost economics, financial cooperatives, credit unions, networks, corporate governance, technical efficiency, X-efficiency

JEL Classification: G2, G3

Suggested Citation

Desrochers, Martin and Fischer, Klaus P., Theory and Test on the Corporate Governance of Financial Cooperative Systems: Merger vs. Networks (September 2003). CIRPEE Working Paper No. 03-34. Available at SSRN: https://ssrn.com/abstract=448982 or http://dx.doi.org/10.2139/ssrn.448982

Martin Desrochers

Developpement International Desjardins ( email )

Levis G6V 6P8, Quebec
Canada

Klaus P. Fischer (Contact Author)

affiliation not provided to SSRN

Register to save articles to
your library

Register

Paper statistics

Downloads
599
Abstract Views
3,528
rank
44,011
PlumX Metrics