Social Embeddedness and Corporate Financing: The Benefits of Social Networks in the Acquisition and Cost of Capital

Using a structural embeddedness approach, we present arguments and evidence on the ways social capital affects the operation of financial capital markets in the context of the small business loan market. We posit that the quality of a relationship between a bank and a corporate borrower, as well as the network structure of ties between the borrower and its bank(s), influences the cost of capital firms pay on their loans. Specifically, we examine two dimensions of structural embeddedness at the dyad level and two at the network level. At the dyad level of analysis, we find that the duration of the relationship and relationship multiplexity are associated with a lower cost of capital (i.e., paying lower interest rates). At the network level, we find that firms that have ego-networks composed of a mix of embedded and arm's-length ties obtain a lower cost of capital than firms with either an ego network composed of arm's-length ties or an ego network composed of only embedded ties. We find no effect for simple ego-network size on the cost of capital. The implications of our embeddedness perspective on corporate social capital are discussed. .