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Legal form as a determinant of the evaluation of agricultural entities in Slovakia using the topsis method

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The agriculture represents one of the sectors of the economy, where economic differentiation is more than obvious. Different efficiency of agricultural entities has been a persistent phenomenon that depends on several objective and subjective factors. One of them is also legal form of agricultural enterprises. In Slovakia, the structure of farms is specific compared to almost any other member states of the European Union. The majority of agricultural land is framed by big farms. These farms with high acreage are usually either agricultural cooperative or Business Company. In the economic literature is a number of important studies identifying the advantages of cooperatives in comparison with other organizational forms, mainly business companies. The aim of this paper is evaluate the economic status of agricultural entities according the legal form using the TOPSIS method.
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Volume V, Issue 1(9), Summer 2014
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Quarterly
Volume VII
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ournal of Environmental Management
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Legal Form as a Determinant of the Evaluation of Agricultural
Entities in Slovakia Using the Topsis Method
Ivana KRAVČÁKOVÁ VOZÁROVÁ, Rastislav KOTULIČ, Roman VAVREK
Summer 2016
Volume VII,
Issue 2(14)
Editor in Chief
Ramona PÎRVU
University of Craiova, Romania
Editorial Advisory Board
Omran Abdelnaser
University Sains Malaysia, Malaysia
Huong Ha
University of Newcastle, Singapore,
Australia
Harjeet Kaur
HELP University College, Malaysia
Janusz Grabara
Czestochowa University of Technology,
Poland
Vicky Katsoni
Techonological Educational Institute of
Athens, Greece
Sebastian Kot
Czestochowa University of Technology,
The Institute of Logistics and International
Management, Poland
Nodar Lekishvili
Tibilisi State University, Georgia
Andreea Marin-Pantelescu
Academy of Economic Studies Bucharest,
Romania
Piotr Misztal
The Jan Kochanowski University in
Kielce, Faculty of Management and
Administration, Poland
Chuen-Chee Pek
Nottingham University Business School,
Malaysia
Roberta De Santis
LUISS University, Italy
Fabio Gaetano Santeramo
University of Foggia, Italy
Dan Selişteanu
University of Craiova, Romania
Laura Ungureanu
Spiru Haret University, Romania
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ISSN 2068 7729
Journal DOI: http://dx.doi.org/10.14505/jemt
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Issue 3(15) Fall 2016
Journal of Environmental Management and Tourism
Journal of Environment Management and Tourism
347
Legal Form as a Determinant of the Evaluation of Agricultural Entities in
Slovakia Using the Topsis Method
Ivana Kravčáková VOZÁROVÁ
University of Presov, Faculty of Management, Slovakia
ivana.vozarova@smail.unipo.sk
Rastislav KOTULIC
University of Presov, Faculty of Management, Slovakia
rastislav.kotulic@unipo.sk
Roman VAVREK
University of Presov, Faculty of Management, Slovakia
roman.vavrek@unipo.sk
Suggested Citation:
Vozárová, Kravčáková I., Kotulic, R., Vavrek, R. (2016). Legal form as a determinant of the evaluation of
agricultural entities in Slovakia using the TOPSIS method, Journal of Environmental Management and
Tourism, (Volume VII, Summer), 2(14): 348-356. DOI: http://dx.doi.org/10.14505/jemt.v7.2(14).20.
Available from: http://www.asers.eu/ journals/jemt/curent-issue
Article’s History:
Received May, 2016; Revised May, 2016; Accepted June, 2016.
2016. ASERS Publishing. All rights reserved.
Abstract:
The agriculture represents one of the sectors of the economy, where economic differentiation is more
than obvious. Different efficiency of agricultural entities has been a persistent phenomenon that depends on
several objective and subjective factors. One of them is also legal form of agricultural enterprises. In Slovakia,
the structure of farms is specific compared to almost any other member states of the European Union. The
majority of agricultural land is framed by big farms. These farms with high acreage are usually either agricultural
cooperative or Business Company. In the economic literature is a number of important studies identifying the
advantages of cooperatives in comparison with other organizational forms, mainly business companies.
The aim of this paper is evaluate the economic status of agricultural entities according the legal form
using the TOPSIS method.
Keywords: business company, agricultural cooperative, legal form, TOPSIS method.
JEL Classification: Q13, L25, M21.
1. Introduction
Agriculture, including farming, forestry, fisheries and livestock is the main source of employment and
income in rural area. The agriculture represents one of the sectors of the economy, where economic
differentiation is more than obvious. Therefore, the economic differentiation of agricultural enterprises was
analyzed using several economic indicators from the perspective of several criteria, as well as natural conditions,
size of the agricultural enterprise measured by the area of agricultural land or the legal form of the business.
Just the last criterion which represents legal form of business will be the subject of our analysis. According to
Gozora (1996) the decision about the legal form requires a more systematic consideration. The decisive criteria
DOI: http://dx.doi.org/10.14505/jemt.v7.2(14).20
Journal of Environment Management and Tourism
348
in the choice of legal form are as follows: the size of company management, financing, guarantee and risk, the
possibility of obtaining credit, tax burden, permanent existence of the company.
2. Literature review
EU countries are largely heterogeneous group. This heterogeneity is given by historical development, as
well as geographic localization, or cultural and social specifics. Main aim of European Union is to realize social
and environmentally sustainable economic development. One of the tools to achieve that state is effort to
increase efficiency of economies (Adamišin et al. 2013). Chrastinová (2008) argued that the differentiated
efficiency in agriculture has been a persistent phenomenon that depends on several objective and subjective
factors applicable on agricultural enterprises. In addition to financial efficiency, we can measure also other types
of efficiency such as technical or allocated. One of the possible approaches in efficiency measurement is using
technical efficiency developed by Sojková et al. (2008). According to Grznár and Szabo (2002), there exist
decisive factors for the success of agricultural enterprises and their prosperity is assessed by the extent of the
coverage of costs incurred, the reproduction rate of production resources or the amount of personal wages.
The transformation of the economy from the centrally planned economy into the market economy was
accompanied by the decrease of the GDP and industrial production in practically all the countries of the Central
and Eastern Europe, in Slovakia too (Matejková et al. 2008). The decrease was caused by a number of factors,
such as the deformed structure of the economy, the loss of the former CMEA markets or trade liberation.
The entry into the new market environment after 1990 marked the beginning of complicated structural,
economic and social changes for agricultural companies that brought a measurable improvement in only few
aspects of the technical performance and competitiveness (Bielik and Rajčániová 2004). New forms of
enterprises were created, the number of subjects increased and their average concentration decreased. After
Slovakia joined the European Union and with the removal of borders between EU member countries, there are
in one hand major new opportunities in the common market, but on the other hand, the farms have to face the
hard competitive pressure. (Mura et al. 2012)
The farms in the EU countries are distinguishable by three main factors: the structural characteristics,
their financial characteristics and productive orientation and the importance of subsidies on the farms. In
Slovakia, the structure of farms is specific compared to almost any other member states of the European Union.
The majority of agricultural land is farmed by big farms. These farms with high acreage usually have two main
legal forms. On the one hand are cooperatives which existed before 1989. On the other hand, at the time of the
transformation process was part of them replaced by business companies (Tóth et al. 2014, Lososová and
Zdeněk 2014). The same approach is indicated by the Statistical office of the Slovak Republic, which in defining
the legal forms of Slovak agricultural entities distinguishes: business companies (limited liability companies,
general commercial partnerships, and joint - stock companies), cooperatives, state-owned enterprises and
contributory organizations. However, the Statistical Office of the Slovak Republic reported the agricultural
production only for business companies and cooperatives, which means that state-owned enterprises and
contributory organizations already are not currently relevant legal form of Slovak agriculture.
The choice of organization structure is a very important decision for agricultural entities. In the economic
literature, there are a number of important studies identifying the advantages of cooperatives in comparison with
other organizational forms, mainly business companies (Némethová 2010, Bijman et al. 2012, Movsisyan 2013).
Láziková and Bandlerová (2006) state that the agricultural cooperatives have successfully defended their
position on agricultural land also among newly formed agricultural enterprises, such as joint stock companies,
limited liability companies or self-employed farmers. The diversity in their management is evident in the long
term, despite the fact that the transformed agricultural cooperatives are trying to keep the trend alongside
business companies.
The International Cooperative Alliance (ICA 2013) defines a cooperative as the autonomous association
of persons united voluntarily to meet their common economic, social, and cultural needs through a jointly owned
and democratically controlled enterprise. The persons who voluntarily unite to form a cooperative are usually
referred to as members or member owners, and one of the key attributes of membership is active participation
in the activity of the cooperative (whether economic, business, or social). A cooperative is a legal entity and in a
certain sense it is an analogue of a shareholder corporation.
According Bijman et al. (2012) the agricultural cooperatives play an important role in helping agricultural
entities to capture a higher share of the value added in the food supply chain in all member states. According to
Journal of Environment Management and Tourism
349
them the main key functions of all cooperatives are improving the bargaining power of their members and letting
members benefit from economies of scale. In addition, the agricultural cooperatives are reducing market risks,
reducing transaction costs, providing access to resources, and strengthening their competitive position through
product innovation and guaranteeing food quality and safety. Bijman et al. (2012) also argue that a large number
of cooperatives have expanded their activities in downstream stages of the food chain, thus strengthening their
customer and consumer orientation by enhancing efforts in marketing, product innovation and customization.
Valentinov says (2007) that the role of agricultural cooperatives is shown to help overcome these limitations in
order to take advantage of the transaction-cost economizing properties of family farms.
The agricultural cooperatives have an important role in supporting small agricultural producers. They
promote their members economically and socially and create sustainable rural employment through business
models that are more resilient to economic and environmental shocks. Agricultural cooperative as a legal form
offers to small agricultural producers the opportunities to access markets, and provide them with a range of
services such as better access to natural resources, information, communication, technologies, credit, training
and warehouses. They also facilitate small producers’ participation in decision-making at all levels, support them
to secure land use rights and to negotiate better terms for engagement in contract farming and better prices for
agricultural inputs. (IFAD 2011)
Sedik and Lerman (2013) distinguish between:
production cooperatives, in which members are jointly engaged in the production process.
service cooperatives, which are the largest and most typical category of cooperatives. These are
cooperatives that provide services to their members, who continue to carry out all production activities
independently on their own.
consumer cooperatives are trading firms that sell consumer goods primarily to their members at
advantageous prices. The largest segment of consumer cooperatives is cooperative food stores and
supermarkets.
In the first years of transformation, the new emerging business companies had the advantage that they
were adjusted for various inefficient assets and in particular old debts in the transition process, which have
created better starting position for further development. (Láziková and Bandlerová 2006)
According to Ministry of Agriculture and Rural Development in Slovak Republic (MARD 2011), the
business companies have achieved a higher effectiveness in the economic result and higher creation of added
value as the agricultural cooperatives. An important item of yields in business companies are revenues from the
sale of goods, which are many times higher than in the agricultural cooperatives.
In Slovakia, higher volume of investment support was allocated to agricultural business companies. In
contrast, to agricultural cooperatives were provided more non-investment subsidies. There persists a higher
employment rate and thus a higher burden of labour costs. The business companies are more indebted, which
demonstrates their greater economic solvency to banks with regard to making a profit, and thus repayment
particularly longer-term loans, which are not covered by support from the EU.
The differences between these legal forms are caused by also the impacts of establishment of the
business companies, which were mostly comprised from the creditworthy parts of agricultural cooperatives
property without adequate acceptance of deposits from banks and business partners, as well as without share
compensation. (MARD 2011)
In our study, we examined two forms of business companies namely, limited liability companies and joint-
stock companies. As we have already mentioned above, other legal forms of business companies do not have
relevant position at the Slovak market. Limited liability companies (LLCs) are recognized as a legal structure in
almost all states; however, tax and liability treatment is different across all states. A limited liability company is
the most commonly used legal form in Slovakia.
The second frequent type of the business companies in agriculture is joint-stock company. In 2014, the
total number of joint-stock companies in agriculture represented about 10% of the total number of all agricultural
companies in Slovakia.
Journal of Environment Management and Tourism
350
3. Methodology and data
The aim of this paper is evaluate the economic status of agricultural entities according the legal form
using the TOPSIS method. We analyzed and compared two groups of agricultural entities: agricultural
cooperatives (AC) and business companies (BC).
The data were ensured by Ministry of Agriculture and Rural Development of the Slovak Republic in the
form of Information sheets, which we have obtained from a company Radela Ltd. The data were analyzed for
the period of 2005-2014. The evaluated file included the subjects according following Table 1.
Table 1 - Research sample
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
AC
578
566
545
538
544
507
526
517
503
487
BC
832
798
819
779
839
798
886
963
980
1000
SR
1410
1364
1364
1317
1383
1305
1412
1480
1483
1487
Source: Own processing.
We quantified the performance of selected companies on the basis of TOPSIS method. Due to the
quantification of efficiency of the selected entities have been selected these ratio indicators that characterize
profitability, activity, liquidity and stability of Slovak agricultural enterprises: Profitability indicators, ROA Return
on total assets, ROS - Return on sales, Activity indicators, DPO - Days payable outstanding, Liquidity indicators,
QR - Quick ratio, Stability indicators, SFR - Self-financing ratio, ICR - Interest coverage ratio.
The calculation of TOPSIS technique is realized by Vavrek, Kotulič and Adamišin (2015), who describe
a total of 7 following steps:
Drawing up the criterion matrix:
mnmjmmm
inijiii
nj
nj
nj
xxxxA
xxxxA
xxxxA
xxxxA
XXXX
D
......
:::::
......
:::::
......
......
......
21
21
2222212
1112111
21
where: Ai = i-th alternative and Xij = j-th value of the parameter achieved by the i-th alternative.
Drawing up the normalized matrix by the formula:
j
jijijij xxr 1
2
/
,
(3.1)
Assigning of weights to individual parameters
ijijij rwv .
,
(3.2)
where: vij = weight of normalized value and wij = weight of parameter.
Identifying the PIS and NIS alternatives. These alternatives consist of real achieved values and in most
cases these are hypothetical alternatives:
)min(),max( ijjijjwDwH
,
(3.3)
where: Hj = PIS, Dj = NIS.
Journal of Environment Management and Tourism
351
Calculating the distance from these alternatives:
2/1
1
2,)(
k
jjijiHwd
,
2/1
1
2,)(
k
jjijiDwd
(3.4)
where: d+ = distance from PIS alternative
d- = distance from NIS alternative.
Calculating the relative distance from the PIS alternative:
ii
i
idd d
c
(3.5)
where: ci = relative distance from the PIS alternative.
Creation of ranking of the alternatives on the basis of the relative distance from the PIS alternative.
As part of TOPSIS technique, the assigning of weights to individual parameters plays an important role
the weights could not be determined exactly. Therefore, in the application of TOPSIS techniques are all
monitored parameters equivalent and the weight of each parameter is vi = 0.1666666666.
The normal distribution of data was verified by the Shapiro-Wilk test and independence of the selections
as well as the homoscedasticity was tested by the Levene's test. In the case of confirmation of both assumptions
was the difference between the legal forms for the whole period tested by ANOVA. The analysis processing was
realized in the computer programs STATISTICA and STATGRAPHICS.
4. Results and discussion
The main purpose of the research was to evaluate the effectiveness of farming of individual legal forms
of agricultural enterprises using TOPSIS technique. TOPSIS technique evaluates the variants using the relative
distance from the PIS alternative based on established parameters. Because in this study we evaluated two
alternatives (AC and BC), their result is determined identified following differences and the absolute difference
of monitored indicators.
The differences between the legal forms were confirmed at the level of 6 parameters. In the group of
agricultural cooperatives can be observed almost perfect correlation between Return on sales and Return on
total assets and their highly correlation with Interest coverage ratio. An interesting conclusion is very strong
negative correlation between the Self-financing ratio and Days payable outstanding, i.e. that the enterprises with
a higher level of self-financing also repay their obligations in a shorter time interval.
Source: Own processing.
Figure 1 - Correlation matrix of parameters for AC, 2005 - 2014
Journal of Environment Management and Tourism
352
Business companies have shown different rates of dependence among the monitored parameters as
agricultural cooperatives. Significantly different situation is documented by the correlation matrix of business
companies (Figure 2). Return on sales and Quick ratio linearly correlated with no parameter. Return on total
assets confirmed its relationship with Interest coverage ratio and Self-financing ratio. An interesting conclusion
is negative correlation between the Return on total assets and Days payable outstanding also as between Days
payable outstanding and Interest coverage ratio.
Source: Own processing.
Figure 2 - Correlation matrix of parameters for BC, 2005 - 2014
Presented correlation matrices show the differences in the management of legal forms of agricultural
companies in the Slovak Republic and also confirm the above identified differences between the parameters
that were monitored in this analysis. In each of the 10 analyzed years, the business companies achieved better
overall assessment based on the monitored parameters. The most significant difference can be seen in 2010;
on the contrary, the most balanced management of these legal forms was in 2012.
Source: Own processing.
Figure 3 - Results of TOPSIS technique - legal forms, 2005 2014
Because one result is determined by the other and complementary their sum is 1, the normal distribution
of both groups is the same (WPD = WOS = 0,913; p = 0,294). The same fact is a cause of full compliance of
their variance, which is confirmed by the Levene's test (LE = 0; p = 1). On the basis of results of one-way analysis
of variance, we can state the difference between the management of legal forms (Table 2) evaluated by TOPSIS
technique.
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
AC 0,2750,3210,3860,325 0,37 0,1420,2840,4280,1610,391
BC 0,7250,6790,6140,675 0,63 0,8580,7160,5720,8390,609
Journal of Environment Management and Tourism
353
Table 2 - ANOVA - comparison of legal forms by TOPSIS technique, 2005 2014
Sum of Squares
Df
Mean Square
F-Ratio
P-Value
Between groups
0,734978
1
0,73497800
80,18
0,0000
Within groups
0,165008
18
0,00916712
TOTAL (Corr.)
0,899986
19
Source: Own processing.
Conclusion
On the basis of results of one-way analysis of variance and evaluation of TOPSIS technique, we can
state the difference between the management of these legal forms. Our analysis confirmed the differences in
economic performance of agricultural entities according to legal forms. We can also argue that the legal form
represents a factor that affects the economic performance of enterprises in the agricultural sector.
Adamišin and Kotulič (2013) argue, whether it is just the legal status of management that determines to
such a significant extent the difference in economic performance of subjects. A higher economic performance
of business companies can be determined not only by different approaches to the management of subjects, but
as well by a better starting situation in the past (contrary to cooperatives), or even the potentially inconveniently
selected basis for comparison of economic performance (agricultural land).
There are also other factors, which have a direct impact on the economic performance and efficiency of
agricultural enterprises. These factors have a direct impact to a limited extent, but this does not mean that we
should not deal with them, for example, the effective management of the agricultural entity, natural and climatic
conditions or legal and legislative framework and others. Kadlečíková et al. (2015) argue that a meaningful factor
for business success of agricultural companies is a strategic management. Strategic management is also
important in relation to agricultural and food production; particularly in connection to adaptation to climate
changes and in ensuring the food security resources required for a steadily growing human population.
Acknowledgement
Supported by the Cultural and Educational Grant Agency of the Ministry of Education, Science, Research
and Sport of the Slovak Republic (Project KEGA No. 035PU-4/2016 on the topic: Microeconomics for managers
- innovation of structure, content and the method of teaching the subject; Project KEGA No. 032PU-4/2014 on
the topic: Preparation of educational materials for the first level of study programme Environmental Management
and follow-up study programme Environmental Management) and by the Scientific Grant Agency of the Ministry
of Education, Science, Research and Sport of the Slovak Republic and the Slovak Academy of Sciences (Project
VEGA No. 1/0139/16 on the topic: Analysis of determinants and factors affecting the efficiency and
competitiveness of entities working the soil in the Slovak Republic).
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... The indicators used to evaluate farm financial performance in any one year are different from those used to assess the financial health of a business (Herdt and Lynam, 1992;Shadbolt et al., 1997). There are several authors who have examined the financial health of agricultural companies, including Adamišin et al. (2017); Dvořák (2007); Henning and Jordaan (2016); Kravčáková Vozárová et al. (2016), Lopez-Valeiras et al. (2016); Majewski (2013); Martínez-Victoria et al. (2018); Sjauw- Koen-Fa et al. (2016); or Vavrek et al. (2021a,b). Despite these research, there is still a scarcity of studies that engage in designing a systematic and comprehensive model for measuring the financial health of the agricultural companies. ...
... From their perspective, the legal form seems to be the key factor, because in the case of businesses, it allows (also by the concentration of ownership of the company) an efficient management, a higher level of the motivation and the concentration of ownership and responsibility. The differences between the management of these legal forms were confirmed also in the study on the basis of the results of one-way analysis of variance and the evaluation of the TOPSIS technique (Kravčáková Vozárová et al., 2016). ...
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... At present, however, there remains a scarcity of research that is suitable for practical decisions about whether a company is at risk and should tackle the potential crisis [13]. There are several authors who have examined the financial health of agricultural companies, including Kravčáková Vozárová et al. [14][15][16], Valašková et al. [17], Adamišin et al. [18], Hornungová and Milichovský [19], Henning and Jordaan [10], Martínez-Victoria et al. [20], Sjauw-Koen-Fa et al. [21], Lopez-Valeiras et al. [22], Majewski [23], and Soboh et al. [24]. However, there remains a scarcity of studies that engage in designing a systematic and comprehensive model for measuring the financial health of agricultural companies. ...
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... Also, according to the study of Adamišin et al. [33], the legal form seems to be the key factor, because for business companies, it allows efficient management (also by concentration of company ownership), a higher level of motivation, and a concentration of ownership and responsibility. The differences in the management of these legal forms were also confirmed in the study by Kravčáková Vozárová et al. [67], which was based on the results of one-way analysis of variance and an evaluation of TOPSIS. A similar problem was analyzed by Chrastinová and Burianová [68], who confirmed that legal forms of business operations also contribute to performance differences. ...
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