The International Effect of Managerial Social Capital on the Cost of Equity

54 Pages Posted: 24 Oct 2016 Last revised: 25 Sep 2017

See all articles by Stephen P. Ferris

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

David Javakhadze

Florida Atlantic University

Tijana Rajkovic

San Jose State University

Date Written: October 6, 2016

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.

Keywords: Social capital; Social networks; Cost of capital

JEL Classification: G31; F30; Z13

Suggested Citation

Ferris, Stephen P. and Javakhadze, David and Rajkovic, Tijana, The International Effect of Managerial Social Capital on the Cost of Equity (October 6, 2016). Journal of Banking & Finance, Volume 74, January 2017, Pages 69–84, Available at SSRN: https://ssrn.com/abstract=2858037

Stephen P. Ferris (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
United States
573-882-6272 (Phone)
573-884-6296 (Fax)

David Javakhadze

Florida Atlantic University ( email )

College of Busines
777 Glades Road
Boca Raton, FL 33433
United States
561-297-2914 (Phone)

Tijana Rajkovic

San Jose State University ( email )

One Washington Square BT851
San Jose, CA 95192
United States
(408) 924-3467 (Phone)

HOME PAGE: http://www.sjsu.edu/people/tijana.rajkovic/

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