Earnings Properties of Co-Operative Firms

There is hardly any evidence on earnings properties of co-operatives for which profit maximisation is not a primary goal. We find that cooperatives in Germany exhibit higher levels of timely loss recognition when they have more members(owners), when they pursue charitable objectives, and when the local corporate income tax rate is high. Cooperatives are more prone to avoid reporting small losses when members can be held privately liable in the cooperative’s bankruptcy and when the local income tax rate is low. Housing cooperatives exhibit different earnings properties than other types of cooperatives. Overall, tax motives are strongly related to cooperatives’ earnings properties, but members’ private liability and agency problems of “equity” also have an influence.

We also analyze how the earnings properties of cooperatives differ from those of (propensity- score matched) privately held corporations. Both types of firm typically have a relatively large number of owners, but in contrast to privately held corporations, cooperatives are generally not profit-maximizing firms and must be run by their owners. We find that cooperatives exhibit a significantly higher propensity to avoid reporting small losses, but also lower absolute discretionary accruals. The evidence on the differences in timely loss recognition is not conclusive. Managers of privately held corporations seem to engage in opportunistic earnings management more aggressively. Still, cooperatives try harder to avoid reporting small losses, indicating that the negative financial and non-financial consequences of “false alarms” seem to be relatively high for cooperatives and their members.