Knowledge spillover in corporate financing networks: embeddedness and the firm's debt performance

Abstract

Building on social embeddedness theory, we examine how the competencies and resources of one corporate actor in a network are transferred to another actor that uses them to enhance transactions with a third actor—a strategic process we dub ‘network transitivity.’ Focusing on the properties of network transitivity in the context of small‐firm corporate finance, we consider how embedded relations between a firm and its banks facilitate the firm's access to distinctive capabilities that enable it to strategically manage its trade‐credit financing relationships. We apply theory and original case‐study fieldwork to explore the types of resources and competencies available through bank–firm relationships and to derive hypotheses about how embedded bank–firm relationships affect the strategy of small‐ to medium‐sized firms. Using a separate large‐scale data set, we then test the generalizability of our hypotheses. Our qualitative analyses show that embedded bank–firm ties provide special governance arrangements that facilitate the firm's access to bank‐centered informational and capital resources, which uniquely enhance the firm's ability to manage trade credit. Consistent with our arguments, our statistical analyses show that small‐ to medium‐sized firms with embedded ties to their bankers were more likely to take lucrative early‐payment trade discounts and avoid costly late‐payment penalties than were similar firms that lacked embedded ties—suggesting that social embeddedness beneficially affects the financial performance of the firm. Copyright © 2002 John Wiley & Sons, Ltd.