Social capital and capital structure

ABSTRACT

The nature of how capital structure can affect firm value is often investigated in the discipline of financial economics. Less investigated is how the nature of the type of assets can affect the choice of capital structure! I demonstrate that in the context of a Modigliani-Miller-type model that a firm financing social capital and physical capital will favor equity financing over debt financing without bankruptcy. With bankruptcy, debt financing will be used, but equity financing will be favored by firms that use large amounts of social capital, as it will increase their value. This demonstrates that social capital alters the financing relationship and helps to explain the preference of firms for equity financing.

KEYWORDS:

• Capital structure
• social capital
• corporate social responsibility
• CSR

JEL:

• G30
• G32

Acknowledgements

The author would like to thank two unnamed reviewers for making substantial improvements to the manuscript.

Disclosure statement

No potential conflict of interest was reported by the author(s).