Do Decision Makers' Debt-risk Attitudes Affect the Agency Costs of Debt?

Number 6/2005/p. 63-80

A Journal of the Canadian Agricultural Economics Society

Do Decision Makers’ Debt-risk Attitudes
Affect the Agency Costs of Debt?¹

Getu Hailu

PhD Candidate, Department of Rural Economy, University of Alberta

Ellen W. Goddard

Professor & Chair, Department of Rural Economy, University of Alberta

Scott R. Jeffrey

Associate Professor, Department of Rural Economy, University of Alberta

This paper was presented at the annual meeting of the Canadian Agricultural
Economics Society (Halifax, June 2004) in a session entitled “What’s Happening
in the Co-operative Sector”. Papers presented at CAES meetings are not subject
to the journal’s standard refereeing process.

The Issue

Over the past 25 years, traditional agricultural co-operatives have been challenged by
competition from local investor-owned firms and multinational companies, deregulation
and globalization of trade, and increased market concentration in suppliers and
purchasers. At the same time, co-operatives have constantly been seeking to add value to
their member services through expansion and/or adoption of new technology. The capital
investment needed for these endeavours has to be financed, and for traditional co-
operatives the major source of financing new investments has been long-term borrowing.
As a result some co-operatives are characterized by high debt loads, which may result in
increased financial risk exposure. Important factors that may influence the level of
financial risk exposure are the potential conflicts between managerial self-interest and the
interest of the owners of the firm (Jensen, 1986; Jensen and Meckling, 1976) and the
impact of these differences on the choice of capital structure (Friend and Lang, 1988;

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