“Bowling Alone, Bowling Together: Is Social Capital Priced in Bank Loans?” by Professor C.S. Agnes CHENG
Professor C.S. Agnes CHENG
Chair Professor and Head
School of Accounting and Finance
The Hong Kong Polytechnic University
We investigate whether societal-level social capital enjoyed by firms affects their cost of bank loans. Employing a measure of societal-level social capital for U.S. counties, we find that firms with higher social capital are associated with lower loan spreads and this effect is not subsumed by measures of financial reporting quality and management characteristics. We also show that the effect of societal-level social capital is more pronounced when alternative information about the borrower is less available. To further identify causality, we utilize two exogenous shocks. Using a sample of firms who relocate their headquarters, we find that firms who move to lower (higher) social capital counties experience higher (lower) cost of bank loans after the relocation. The second shock is the terrorist attack on September 11, 2001. After the disaster, social capital in affected counties ‒ mainly the State of New York, the State of Virginia, and adjacent counties ‒ increases through social capital building. We show that firms headquartered in affected counties experience significantly lower loan spreads than other firms after the attack. Our findings contribute to the rising literature on the benefits of social capital.