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

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 (C) 2002 John Wiley Sons, Ltd.