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Local social environment and the speed of leverage adjustment

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  • Tongxia Li
  • Chun Lu

Abstract

This study examines the impact of social capital on firms’ leverage adjustment speed. Using a comprehensive dataset of 83,374 firm‐year observations for 744 US counties for 1990–2016, we find that both underleveraged and overleveraged firms located in US counties with higher levels of social capital incur slower leverage adjustment towards their optimal target capital structure. This finding is robust to alternative measures of leverage and social capital, different model specifications, controlling for county‐ and firm‐level characteristics, and endogeneity. We further identify two mechanisms through which social capital affects leverage adjustments: monitoring (channel for underleveraged firms) and disciplinary (channel for overleveraged firms) mechanisms.

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  • Tongxia Li & Chun Lu, 2023. "Local social environment and the speed of leverage adjustment," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 1919-1952, June.
    • Handle: RePEc:bla:acctfi:v:63:y:2023:i:2:p:1919-1952
    DOI: 10.1111/acfi.12937
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