Abstract
This paper investigates how social capital, defined by the strength of civic norms and the density of social networks, affects firms’ trade credit risk. The results show that social capital is negatively related to accounts receivables that are unlikely to be collected, suggesting that social capital can mitigate collectability risk. Furthermore, this negative effect is stronger in firms subject to financial inflexibility but weaker in firms offering executives more risk-taking incentives. Conversely, the negative effect of social capital is not conditional on corporate governance quality. The mediation analysis shows that reducing trade credit risk is an important channel through which social capital attenuates overall firm risk. Taken together, these results support the notion that social capital, an important environmental factor surrounding corporate headquarters, motivates managers to avoid risky conduct and lower trade credit risk.
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