Social Embeddedness and Corporate
Financing:
The Benefits of Social Networks in the Acquisition and Cost
of Capital
Brian
Uzzi and James J. Gillespie
Abstract
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.
Brian Uzzi, Department
of Organization Behavior, Kellogg Graduate School of Management,
Northwestern University
James J. Gillespie, Department of Organization
Behavior, Kellogg Graduate School of Management, Northwestern University
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