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Social capital and the cost of equity

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  • Gupta, Atul
  • Raman, Kartik
  • Shang, Chenguang

Abstract

We find that a firm's cost of equity is inversely related to the level of social capital in the state where the firm is headquartered. Further, the cost of equity declines when firms move their headquarters from a low-social-capital state to a state with higher social capital. The negative relation between social capital and the cost of equity is statistically significant only for firms facing relatively low levels of product–market competition and is not significant for firms with good firm-specific reputations. We interpret these findings as indicating that social capital serves as a societal monitoring mechanism, and can be value-enhancing for firms that are perceived as having greater agency problems and face weak product market monitoring.

Suggested Citation

  • Gupta, Atul & Raman, Kartik & Shang, Chenguang, 2018. "Social capital and the cost of equity," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 102-117.
  • Handle: RePEc:eee:jbfina:v:87:y:2018:i:c:p:102-117
    DOI: 10.1016/j.jbankfin.2017.10.002
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    More about this item

    Keywords

    Social capital; Trust; Moral hazard; Agency; Cost of equity;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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