We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting.

We investigate whether the levels of social capital in U.S. counties, as captured by strength of civic norms and density of social networks in the counties, are systematically related to tax avoidance activities of corporations with headquarters located in the counties. We find strong negative associations between social capital and corporate tax avoidance, as captured by effective tax rates and book-tax differences. These results are incremental to the effects of local religiosity and firm culture toward socially irresponsible activities. They are robust to using organ donation as an alternative social capital proxy and fixed effect regressions. They extend to aggressive tax avoidance practices. Additionally, we provide corroborating evidence using firms with headquarters relocation that changes the exposure to social capital. We conclude that social capital surrounding corporate headquarters provides environmental influences constraining corporate tax avoidance.