Do Social Enterprises Finance Their Investments Differently from For-profit Firms? The Case of Social Residential Services in Italy

We develop a theoretical framework, based on a moneylender--firm relationship with moral hazard, to investigate whether enterprise capital structure differs between for-profit and nonprofit sectors. The nondistribution constraint of the nonprofit organizations increases the fraction of own capital on total investment: according to our theoretical predictions, this reduces leverage, defined as the amount borrowed over the total investment. By contrast, the intrinsically high commitment of nonprofit entrepreneurs weakens the moral hazard problem: this augments leverage. We then analyze a longitudinal data set of balance sheets of 504 firms operating in the social residential sector in Italy. Our empirical analysis shows that once controlled for observable characteristics, for-profit companies have a leverage 6% higher than nonprofit enterprises, even if the latter face lower credit costs. We explain this finding by arguing that the effect of the nondistribution constraint prevails over the effect of the social entrepreneurs' intrinsic motivation.