We find that both firm leverage and short-term debt ratios are negatively associated with social capital (i.e., the altruistic tendency and mutual trust among people within a community). This relation is more pronounced in cases where information asymmetry problems are more severe and is robust to using alternative measures of key variables, addressing endogeneity issues, employing alternative model specifications, and simultaneously estimating leverage and short-term debt. An analysis on debt structure (bank loans vs. public debt) shows consistent results. Our findings are in line with the idea that social capital lowers the need for corporate borrowing mechanisms as a means to alleviate agency problems for firms.
