Do Social Enterprises Finance Their Investments Differently from For-profit Firms? The Case of Social Residential Services in Italy

Abstract

We develop a theoretical framework, based on a moneylender–firm relationship with moral hazard, to investigate whether enterprise capital structure differs between for-profit and nonprofit sectors. The nondistribution constraint of the nonprofit organizations increases the fraction of own capital on total investment: according to our theoretical predictions, this reduces leverage, defined as the amount borrowed over the total investment. By contrast, the intrinsically high commitment of nonprofit entrepreneurs weakens the moral hazard problem: this augments leverage. We then analyze a longitudinal data set of balance sheets of 504 firms operating in the social residential sector in Italy. Our empirical analysis shows that once controlled for observable characteristics, for-profit companies have a leverage 6% higher than nonprofit enterprises, even if the latter face lower credit costs. We explain this finding by arguing that the effect of the nondistribution constraint prevails over the effect of the social entrepreneurs' intrinsic motivation.

Key Words:

• For-profit and nonprofit enterprises
• capital structure

Acknowledgements

We thank Wim Van Opstal, Charles Jardine, an anonymous reviewer and the seminar audience at II EMES International Conference on Social Enterprise, University of Trento, Italy, July 2009, and ISIRC 2009 (International Social Innovation Research Conference), Said Business School, Oxford, UK, September 2009, for useful comments. The usual disclaimer applies.

Notes

1. According to the Merriam-Webster Dictionary (online edition), morale refers to ‘the mental and emotional condition (as of enthusiasm, confidence, or loyalty) of an individual or group with regard to the function of tasks at hand’.

2. Throughout the paper we refer to the entrepreneur as ‘he’ and to each lender as ‘she’.

3. More precisely, higher A makes the lenders' participation constraint less binding and, as a consequence, there is more credit available for the firm.

4. This holds as long as the firm has a positive nonliquid wealth to be put up as collateral. Indeed, it can be checked that the level of M does not affect optimal leverage L* if C = 0.

5. In a previous version of the paper (see http://www.euricse.eu/sites/default/files/Fedele.pdf) we also used data for companies operating in the health and social nonresidential services. Here we focus on the residential social services because only in this sector do we have a number of both profit and nonprofit firms sufficient to run a sensible comparison between the two types.