Hostname: page-component-78c5997874-j824f Total loading time: 0 Render date: 2024-11-15T10:51:42.489Z Has data issue: false hasContentIssue false
  • English
  • Français

Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds

Published online by Cambridge University Press:  03 May 2017

Iftekhar Hasan ,
Chun Keung Hoi ,
Qiang Wu  and
Hao Zhang
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 3 , June 2017 , pp. 1017 - 1047
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

The paper benefited greatly from valuable comments and suggestions from an anonymous referee and Paul Malatesta (the editor). We are grateful for helpful comments from colleagues at our respective institutions. Hoi and Zhang thank the Saunders College of Business at RIT for summer research support. Wu thanks the Lally School of Management at RPI for research support through an A. C. Lawrence Research Fellowship.

References

Alesina, A., and La Ferrara, E.. “Participation in Heterogeneous Communities.” Quarterly Journal of Economics, 115 (2000), 847–904.Google Scholar
Barton, J., and Waymire, G.. “Investor Protection under Unregulated Financial Reporting.” Journal of Accounting and Economics, 38 (2004), 65–116.Google Scholar
Bebchuk, L.“Ex Ante Costs of Violating Absolute Priority in Bankruptcy.” Journal of Finance, 57 (2002), 445–460.CrossRefGoogle Scholar
Besanko, D., and Kanatas, G.. “Credit Market Equilibrium with Bank Monitoring and Moral Hazard.” Review of Financial Studies, 6 (1993), 213–232.CrossRefGoogle Scholar
Bharath, S. T.; Dahiya, S.; Saunders, A.; and Srinivasan, A.. “Lending Relationships and Loan Contract Terms.” Review of Financial Studies, 24 (2011), 1141–1203.CrossRefGoogle Scholar
Bharath, S.; Sunder, J.; and Sunder, S.. “Accounting Quality and Debt Contracting.” Accounting Review, 83 (2008), 1–28.CrossRefGoogle Scholar
Bjornskov, C.“Corruption and Social Capital.” Working Paper, Aarhus School of Business (2003).Google Scholar
Buonanno, P.; Montolio, D.; and Vanin, P.. “Does Social Capital Reduce Crime?” Journal of Law and Economics, 52 (2009), 145–170.CrossRefGoogle Scholar
Cai, J., and Shi, G.. “Value of Faith: Evidence on Religious Environment and Cost of Debt.” Working Paper, Drexel University (2014).Google Scholar
Coleman, J.“Social Capital in the Creation of Human Capital.” American Journal of Sociology, 94 (1988), S95–S120.CrossRefGoogle Scholar
Dechow, P.; Sloan, R.; and Sweeney, A.. “Detecting Earnings Management.” Accounting Review, 70 (1995), 193–225.Google Scholar
DeFond, M., and Jiambalvo, J.. “Debt Covenant Violation and Manipulation of Accruals.” Journal of Accounting and Economics, 17 (1994), 145–176.Google Scholar
Demerjian, P.“Accounting Standards and Debt Covenants: Has the ‘Balance Sheet Approach’ Led to a Decline in the Use of Balance Sheet Covenants?” Journal of Accounting and Economics, 52 (2011), 178–202.CrossRefGoogle Scholar
Denis, D., and Mihov, V.. “The Choice among Bank Debt, Nonbank Private Debt, and Public Debt: Evidence from New Corporate Borrowings.” Journal of Financial Economics, 70 (2003), 3–28.Google Scholar
Diamond, D. W.“Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt.” Journal of Political Economy, 99 (1991), 689–721.CrossRefGoogle Scholar
Duarte, J.; Siegel, S.; and Young, L.. “Trust and Credit: The Role of Appearance in Peer-to-Peer Lending.” Review of Financial Studies, 25 (2012), 2455–2484.Google Scholar
Elster, J.“Social Norms and Economic Theory.” Journal of Economic Perspectives, 3 (1989), 99–117.Google Scholar
Engelberg, J.; Gao, P.; and Parsons, C. A.. “Friends with Money.” Journal of Financial Economics, 103 (2012), 169–188.Google Scholar
Fama, E.“What’s Different about Banks?” Journal of Monetary Economics, 15 (1985), 29–39.Google Scholar
Fischer, H., and Pollock, T.. “Effects of Social Capital and Power on Surviving Transformational Change: The Case of Initial Public Offerings.” Academy of Management Journal, 47 (2004), 463–481.CrossRefGoogle Scholar
Francis, B.; Hasan, I.; Koetter, M.; and Wu, Q.. “Corporate Boards and Bank Loan Contracting.” Journal of Financial Research, 35 (2012), 521–552.CrossRefGoogle Scholar
Fukuyama, F.“Social Capital and the Global Economy.” Foreign Affairs, 74 (1995), 89–104.Google Scholar
Fukuyama, F.“Social Capital and the Modern Capitalist Economy: Creating a High Trust Workplace.” Stern Business Magazine, 4 (1997), 4–17.Google Scholar
Funk, P.“Social Incentives and Voter Turnout: Evidence from the Swiss Mail Ballot System.” Journal of the European Economic Association, 8 (2010), 1077–1103.Google Scholar
Galai, D., and Masulis, R.. “The Option Pricing Model and the Risk Factor of Stock.” Journal of Financial Economics, 3 (1976), 53–81.Google Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.CrossRefGoogle Scholar
Goss, A., and Roberts, G.. “The Impact of Corporate Social Responsibility on the Cost of Bank Loans.” Journal of Banking and Finance, 35 (2011), 1794–1810.CrossRefGoogle Scholar
Graham, J.; Li, S.; and Qiu, J.. “Corporate Misreporting and Bank Loan Contracting.” Journal of Financial Economics, 89 (2008), 44–61.Google Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “The Role of Social Capital in Financial Development.” American Economic Review, 94 (2004), 526–556.Google Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Civic Capital as the Missing Link.” In Handbook of Social Economics, Benhabib, J., Bisin, A., and Jackson, M., eds. Oxford, UK: Elsevier Science (2010), 417–480.Google Scholar
Hasan, I.; Hoi, C. K.; Wu, Q.; and Zhang, H.. “Beauty Is in the Eye of the Beholder: The Effect of Corporate Tax Avoidance on the Cost of Bank Loans.” Journal of Financial Economics, 113 (2014), 109–130.CrossRefGoogle Scholar
Hasan, I.; Hoi, C. K.; Wu, Q.; and Zhang, H.. “Does Social Capital Affect Corporate Decisions? Evidence from Corporate Tax Avoidance.” Journal of Accounting Research, forthcoming (2017).Google Scholar
Higgins, T.“Self-Discrepancy: A Theory Relating Self and Affect.” Psychological Review, 94 (1987), 319–340.CrossRefGoogle ScholarPubMed
Hilary, G., and Hui, K. W.. “Does Religion Matter in Corporate Decision Making in America?” Journal of Financial Economics, 93 (2009), 455–473.CrossRefGoogle Scholar
Hoi, C. K.; Wu, Q.; and Zhang, H.. “Community Social Capital and Corporate Social Responsibility.” Journal of Business Ethics, forthcoming (2017).Google Scholar
Hong, H.; Kubik, J. D.; and Stein, J.. “Social Interaction and Stock-Market Participation.” Journal of Finance, 59 (2004), 137–163.Google Scholar
Ivashina, V.“Asymmetric Information Effects on Loan Spreads.” Journal of Financial Economics, 92 (2009), 300–319.Google Scholar
Jha, A., and Chen, Y.. “Audit Fees and Social Capital.” Accounting Review, 90 (2015), 611–639.Google Scholar
Jiang, F.; John, K.; Li, W.; and Qian, Y.. “Earthly Reward to the Religious: Religiosity and the Costs of Public and Private Debt.” Working Paper, University of Iowa (2014).CrossRefGoogle Scholar
Jones, J.“Earnings Management during Import Relief Investigations.” Journal of Accounting Research, 29 (1991), 193–228.CrossRefGoogle Scholar
Kim, E. H., and Lu, Y.. “CEO Ownership, External Governance, and Risk-Taking.” Journal of Financial Economics, 102 (2011), 272–292.Google Scholar
Klock, M. S.; Mansi, S.; and Maxwell, W.. “Does Corporate Governance Matter to Bondholders?” Journal of Financial and Quantitative Analysis, 40 (2005), 693–719.CrossRefGoogle Scholar
Knack, S.“Social Capital and the Quality of Government: Evidence from the States.” American Journal of Political Science, 46 (2002), 772–785.Google Scholar
Knack, S., and Keefer, P.. “Does Social Capital Have an Economic Payoff? A Cross-Country Investigation.” Quarterly Journal of Economics, 112 (1997), 1251–1288.Google Scholar
Krishnaswami, S.; Spindt, P. A.; and Subramaniam, V.. “Information Asymmetry, Monitoring, and the Placement Structure of Corporate Debt.” Journal of Financial Economics, 51 (1999), 407–434.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Trust in Large Organizations.” American Economic Review, 87 (1997), 333–338.Google Scholar
Lederman, D.; Loayza, N.; and Menendez, A.. “Violent Crime: Does Social Capital Matter?” Economic Development and Cultural Change, 50 (2002), 509–539.Google Scholar
Mazar, N.; Amir, O.; and Ariely, D.. “The Dishonesty of Honest People: A Theory of Self-Concept Maintenance.” Journal of Marketing Research, 45 (2008), 633–644.Google Scholar
Monin, B., and Jordan, A.. “The Dynamic Moral Self: A Social Psychological Perspective.” In Explorations in Moral Psychology, Narvaez, D. and Lapsley, D., eds. Cambridge, UK: Cambridge University Press (2009), 341–354.Google Scholar
Nakamura, L.“Commercial Bank Information: Information for the Structure of Banking.” In Structural Change in Banking, White, L. and Klausner, M., eds. Homewood, IL: Business One Irwin (1993), 131–160.Google Scholar
Nini, G.; Smith, D. C.; and Sufi, A.. “Creditor Control Rights and Firm Investment Policy.” Journal of Financial Economics, 92 (2009), 400–420.Google Scholar
Pevzner, M.; Xie, F.; and Xin, X.. “When Firms Talk, Do Investors Listen? The Role of Trust in Stock Market Reactions to Corporate Earnings Announcements.” Journal of Financial Economics, 117 (2015), 190–223.Google Scholar
Posner, E. Law and Social Norms. Cambridge, MA: Harvard University Press (2000).Google Scholar
Posner, R.“A Theory of Primitive Society, with Special Reference to Law.” Journal of Law and Economics, 23 (1980), 1–53.Google Scholar
Putnam, R. Making Democracy Work: Civic Traditions in Modern Italy. Princeton, NJ: Princeton University Press (1993).Google Scholar
Putnam, R.“Social Capital: Measurement and Consequences.” Canadian Journal of Policy Research, 2 (2001), 41–51.Google Scholar
Putnam, R.“E Pluribus Unum: Diversity and Community in the Twenty-First Century. The 2006 Johan Skytte Prize Lecture.” Scandinavian Political Studies, 30 (2007), 137–174.Google Scholar
Rupasingha, A., and Goetz, S.. “Social and Political Forces as Determinants of Poverty.” Journal of Socio-Economics, 36 (2007), 650–671.Google Scholar
Rupasingha, A.; Goetz, S.; and Freshwater, D.. “The Production of Social Capital in US Counties.” Journal of Socio-Economics, 35 (2006), 83–101.Google Scholar
Spagnolo, G.“Social Relations and Cooperation in Organizations.” Journal of Economic Behavior and Organization, 38 (1999), 1–25.CrossRefGoogle Scholar
Strahan, P. E.“Borrower Risk and the Price and Nonprice Terms of Bank Loans.” Federal Reserve Bank of New York Staff Report 90 (1999).Google Scholar
Uhlaner, C.“Rational Turnout: The Neglected Role of Groups.” American Journal of Political Science, 33 (1989), 390–422.Google Scholar
Uzzi, B.“The Sources and Consequences of Embeddedness for the Economic Performance of Organizations: The Network Effect.” American Sociological Review, 61 (1996), 674–698.Google Scholar
Valta, P.“Competition and the Cost of Debt.” Journal of Financial Economics, 105 (2012), 661–682.Google Scholar