Local social environment and the speed of leverage adjustment

Abstract This study examines the impact of social capital on firms’ leverage adjustment speed. Using a comprehensive dataset of 83,374 firm‐year observations for 744 US counties for 1990–2016, we find that both underleveraged and overleveraged firms located in US counties with higher levels of social capital incur slower leverage adjustment towards their optimal target capital structure. This finding is robust to alternative measures of leverage and social capital, different model specifications, controlling for county‐ and firm‐level characteristics, and endogeneity. We further identify two mechanisms through which social capital affects leverage adjustments: monitoring (channel for underleveraged firms) and disciplinary (channel for overleveraged firms) mechanisms.