The Spillover Effect of Social Capital Along the Supply Chain: Evidence from the Cost of Debt

Prior research indicates that social capital constrains opportunistic behavior and facilitates cooperation in bilateral relationships. We hypothesize that firms conducting business with high social capital customers are perceived by their banks as having lower supply chain risk and document a negative association between suppliers’ loan spreads and the social capital of their major customers. Our cross-sectional analyses show that the negative association is stronger when (1) suppliers make more relationship-specific investments or have weaker bargaining power; and (2) customers’ information environment is more opaque. Further analyses reveal that customers’ social capital has a positive impact on their supplier firms’ nonpricing loan terms. Taken together, our findings indicate that customers’ social capital engenders a spillover effect along the supply chain, enabling suppliers to enjoy lower borrowing costs and more favorable nonpricing loan terms by mitigating the hold-up risks they face. This paper was accepted by Ranjani Krishnan, accounting. Funding: Y. Guan received financial support from Nanyang Technological University [Start-up Grant 021234-00001]. X. Li received financial support from the National Natural Science Foundation of China [Grant 72302180] and the China Postdoctoral Science Foundation [Grants 2025T180187 and 2021M692542]. H. Wu received financial support from City University of Hong Kong. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2024.04778 .