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The international effect of managerial social capital on the cost of equity

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  • Ferris, Stephen P.
  • Javakhadze, David
  • Rajkovic, Tijana

Abstract

We examine the effect of managerial social capital on the firm's cost of equity capital. We argue that social ties alleviate information asymmetry and agency problems, which in turn leads to a decrease in the cost of equity. Using a large panel of companies from 52 countries over the period 1999–2012, we document that social capital inversely affects the cost of equity. Our evidence suggests that the association between social capital and the cost of equity capital is stronger in underdeveloped financial markets and those characterized by weak legal protection. The marginal effect of social capital is also stronger for constrained firms with profitable investment opportunities. Our results are robust to alternative model specifications and tests for endogeneity.

Suggested Citation

  • Ferris, Stephen P. & Javakhadze, David & Rajkovic, Tijana, 2017. "The international effect of managerial social capital on the cost of equity," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 69-84.
    • Handle: RePEc:eee:jbfina:v:74:y:2017:i:c:p:69-84
    DOI: 10.1016/j.jbankfin.2016.10.001
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    More about this item

    Keywords

    Social capital; Social networks; Cost of capital;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • F30 - International Economics - - International Finance - - - General
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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