Community social capital and corporate decisions

This study scrutinises the intricate nexus between community social capital and corporate decision-making in US firms using comprehensive data spanning from 1991 to 2020. Our objective is to clarify the multifaceted dynamics influencing corporate decision-making by examining the impact of social capital on earnings management, financial policies, and analyst following through rigorous empirical analysis. Initially underscoring the foundational role of social capital in fostering conducive environments for economic progress, we draw upon social capital theory to posit that communities with robust social capital are inclined toward collective action and cooperation, fostering efficient resource allocation and productive investment endeavours, ultimately enhancing firm’s long-term value creation. Employing diverse methodology such as time series data regression analysis and fixed effects models, we empirically test these hypotheses (that is, community higher social capital impacts earnings management, financial policies and analysts following), unearthing several critical insights. These results underscore the substantial influence of community social capital on firms’ capital structure choices and financial risk management strategies. Furthermore, our analysis elucidates a direct association between community social capital and analyst following, revealing that firms situated in areas characterized by strong social networks and active civic engagement garner greater attention from financial analysts due to perceived stability and growth potential. This underscores the pivotal role of social capital in shaping market perceptions and investor behaviour, thereby influencing firms’ capital acquisition and cost of capital. Additionally, this study incorporates comprehensive analyses accounting for various firm-specific, state-level, and industry-specific factors, including alternative indicators of social capital at the county level. This study reinforces the initial findings by revealing a persistent and significant relationship between community social capital and earnings management across various models of discretionary accruals. Additionally, a robust association is observed between social capital and analyst following, as well as financial metrics such as net financing and book and market leverage, particularly within the manufacturing industry. In contrast, within the service industry, the influence of social capital on interest expenses is statistically significant, while other financial policy metrics remain insignificant. Moreover, firm size emerges as a critical factor influencing the relationship between community social capital and corporate decision-making. In conclusion, this study contributes to the expanding literature on the influence of social capital on the financial decision-making of the firm by providing empirical evidence in the US economy.