Social Capital and Debt Concentration

Abstract

This study examines how social capital affects firms’ choices of debt concentration. We argue that creditors perceive social capital as providing environmental pressure that constrains opportunistic firm behavior and facilitates coordination and cooperation. Creditors are more likely to perceive that the default resolution plans proposed by managers of firms headquartered in high-social-capital U.S. counties reflect collective interests instead of narrow self-interests, which lowers coordination failures and, hence, lowers bankruptcy costs associated with a dispersed debt structure. Consistent with this prediction, we find that firms in high social capital countries exploit a more dispersed debt structure. This effect is more pronounced in firms with high bankruptcy costs and information asymmetry. We also find that firms headquartered in counties with high social capital are more likely to agree on a pre- arrangement before filing a bankruptcy case, supporting the premise that high social capital facilitates creditor coordination.

Keywords: social capital, debt structure, debt concentration, creditor coordination, bankruptcy

JEL Classification: M14,G32,G33.