The Consequences of Financial Leverage: Certified B Corporations’ Advantages Compared to Common Commercial Firms

Paeleman, Ine; Guenster, Nadja; Vanacker, Tom; Siqueira, Ana Cristina O. Article — Published Version The Consequences of Financial Leverage: Certified B Corporations’ Advantages Compared to Common Commercial Firms Journal of Business Ethics Provided in Cooperation with: Springer Nature Suggested Citation: Paeleman, Ine; Guenster, Nadja; Vanacker, Tom; Siqueira, Ana Cristina O. (2023) : The Consequences of Financial Leverage: Certified B Corporations’ Advantages Compared to Common Commercial Firms, Journal of Business Ethics, ISSN 1573-0697, Springer Netherlands, Dordrecht, Vol. 189, Iss. 3, pp. 507-523, https://doi.org/10.1007/s10551-023-05349-5 This Version is available at: https://hdl.handle.net/10419/315337 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ Vol.:(0123456789) 1 3 Journal of Business Ethics (2024) 189:507–523 https://doi.org/10.1007/s10551-023-05349-5 ORIGINAL PAPER The Consequences ofFinancial Leverage: Certified B Corporations’ Advantages Compared toCommon Commercial Firms InePaeleman1 · NadjaGuenster2· TomVanacker3,5· AnaCristinaO.Siqueira4 Received: 25 June 2021 / Accepted: 29 January 2023 / Published online: 14 February 2023 © The Author(s) 2023 Abstract Firms usually need to attract debt to form and grow, but increasing financial leverage also entails increased risks and costs for stakeholders, such as customers and employees. Accordingly, past research suggests that for common commercial firms (CCFs), which prioritize profits, higher leverage leads to lower sales growth and higher employment costs. However, Certified B Corporations (CBCs) distinguish themselves by having a credible prosocial mission and, therefore, might be better insulated against the adverse effects of higher leverage. Using a European multi-country matched sample of 136 CBCs and 136 CCFs, we find that the negative relationship between leverage and sales growth and the positive relationship between leverage and employment costs are weaker for CBCs than CCFs. Taken together, due to their certified prosocial mission, CBCs enjoy an advantage in debt financing compared to CCFs. Keywords B Corp social firms· Entrepreneurial finance· Social entrepreneurship Introduction Certified B Corporations (CBCs) represent a growing global movement that uses traditional business and market-oriented models to address grand societal challenges, such as building more inclusive and sustainable economies (e.g., Branzei etal., 2018; Parker etal., 2019; Patel & Chan, 2021; Pollack etal., 2021; Villela etal., 2021). CBCs are hybrid companies: while they (need to) pursue profits, just like common commercial firms (CCFs), they also participate in social and environmental audits that are conducted by the independent, nonprofit B Lab (Moroz etal., 2018). This certification allows firms to formally commit to social and environmental goals beyond financial goals. As Moroz etal., (2018, p. 119) state: “CBCs are a distinct and readily identifiable set of businesses that epitomize the core aspects of social hybrid organizations… CBCs must publicly consider people, planet, and profit….”.1 CBCs are a specific set of social hybrid firms (e.g., Branzei etal., 2018; Gehman & Grimes, 2017; Grimes etal., 2018; Moroz etal., 2018; Sharma etal., 2018). Scholars have started to investigate the financing of social hybrid firms more broadly (Bruton etal., 2015; Calic & Mosakowski, 2016; Desa & Basu, 2013; Markman etal., 2016; Siqueira etal., 2018). Financing is important because it can critically affect firms’ scalability (OECD, 2018) and, therefore, their ability to address grand societal challenges. However, to date, we lack insights into the consequences of social hybrid firms’ financial structures; an issue we address in * Ine Paeleman [email protected] Nadja Guenster Nadja.Guens[email protected].de Tom Vanacker TomR.Vanack[email protected] Ana Cristina O. Siqueira [email protected] 1 Faculty ofBusiness andEconomics, University ofAntwerp, Prinsstraat 13, 2000Antwerp, Belgium 2 School ofBusiness andEconomics, Finance Center Muenster, University ofMuenster, Universitaetsstr. 14-16, 48149Muenster, Germany 3 Faculty ofEconomics andBusiness Administration, Ghent University, Sint-Pietersplein 7, 9000Ghent, Belgium 4 Cotsakos College ofBusiness, William Paterson University, 1600 Valley Road, Wayne, NJ07470, USA 5 University ofExeter Business School, Rennes Drive, ExeterEX44PU, UK 1 The Benefit Corporation legal status in the United States is distinct from the B Corp Certification, which operates in multiple countries. For a detailed discussion, see Lucas et al. (2022), Rawhouser etal. (2015) or Siqueira etal. (2018). 508 I.Paeleman et al. 1 3 the current paper. This gap is problematic because the current theoretical perspectives on the consequences of firms’ financial structures, which mainly come from finance, depict people as primarily self-interested and focused on personal financial value maximization (Donaldson & Davis, 1991). However, we cannot simply generalize the insights from such perspectives to CBCs and social hybrid firms more broadly. Indeed, CBCs’ utility functions are different than their common “commercial” counterparts. Certainly, CBCs also care about profits. As one entrepreneur in Conger etal., (2018, p. 189) states: “If we did everything for the greater good—we’d have to close the doors here”. However, CBCs are a distinct set of firms that usually have a strong prosocial mission (Conger etal., 2018). These firms’ stakeholders, such as customers and employees, often share and value CBCs’ mission (e.g., Austin etal., 2006; Bianchi etal., 2020; Conger etal., 2018; Winkler etal., 2019). Conversely, CCFs, which focus on profit maximization as a primary goal, can also have (secondary) social and environmental goals (e.g., Estrin etal., 2013). But while many firms talk about “doing good”, talk is cheap and does not necessarily represent the facts (e.g., greenwashing) (Parguel etal., 2011). Before getting certified, however, CBCs are carefully audited and the certification entails costs (Parker etal., 2019). Hence, CBCs’ certification could serve as an easily identifiable, credible signal of their prosocial mission toward stakeholders (Chauhan & O’Neill, 2020). Accordingly, managers in CBCs and stakeholders can react differently to financial structures than their counterparts in CCFs. Therefore, we study the effects of leverage as a key aspect of a firm’s financial structure. We define leverage as the proportion of assets financed by debt with a maturity of more than one year. Previous research on CCFs, in which people are assumed to be primarily focused on maximizing financial wealth, emphasizes the negative consequences of leverage for customers and employees (Hortaçsu etal., 2013; Maksimovic & Titman, 1991; Moussu & Ohana, 2016). Accordingly, in CCFs, higher leverage can lead to losses in sales growth and increasing employment costs (Akyol & Verwijmeren, 2013; Titman, 1984). In this paper, the primary focus is on CBCs, which have a strong prosocial mission and stakeholders that share their non-financial goals, and we ask: How does leverage relate to the sales growth and employment costs of CBCs in comparison to CCFs? Extant perspectives from finance highlight that selfinterested entrepreneurs who prioritize personal wealth have incentives to transfer some of the costs of higher leverage to their customers and employees (Titman, 1984). In more highly leveraged firms, there is a higher risk of financial distress. Higher leverage and financial distress could affect (prospective) customers who might expect to lose warranties and product support, and it could even become financially optimal for entrepreneurs to decrease the safety and quality of their products and services (Kini etal., 2017; Maksimovic & Titman, 1991). Accordingly, self-interested customers could decide to buy from other firms and thereby hampers sales growth. Moreover, higher leverage also affects employees who face higher unemployment risk, earnings losses, and higher losses of firm-specific human capital. Therefore, selfinterested employees, who optimize their own financial situation, could require higher compensation for bearing these risks (Berk etal., 2010). The combination of these “stylized facts” from the finance literature, which has often focused on US public firms, shows that leverage is negatively related to sales growth and positively related to employment costs. We hypothesize that the above effects of leverage will be more likely to occur in CCFs but are less pertinent to CBCs and their stakeholders. We argue that the certification of CBCs ensures that these firms have a genuine goal to create a positive social impact (Cao etal., 2017; Doherty etal., 2014). Accordingly, CBCs may want to minimize the possible negative effects of higher leverage on employees and customers. Moreover, CBCs’ certification may serve as a visible and credible signal of their prosocial motivations (Cao etal., 2017; Parker etal., 2019) for (prospective) customers and employees. Accordingly, CBCs’ employees and customers—who frequently share the CBCs’ social mission (Austin etal., 2006)—may also be less inclined to require higher wages which decreases firms’ employment costs, or switch to other suppliers when the leverage and thus risk of the firm increases. Consequently, we hypothesize that the negative relationship between leverage and sales growth and the positive relationship between leverage and employment costs will be significantly weaker in CBCs than in CCFs. To test our hypotheses, we constructed a unique database of 136 CBCs and 136 matched CCFs from six European countries (Italy, Spain, France, United Kingdom, Portugal, and Germany). We matched the CBCs with CCFs in the year of certification based on four characteristics: country, industry, age, and size (e.g., Puri & Zarutskie, 2012; Siqueira etal., 2018). While a significant stream of research on CBCs has used small samples, our sample covers about 25% of the European population of CBCs that is equivalent to Parker etal.,’s (2019) large-scale study of North American CBCs that captured about 27% of that population. An advantage to the European research setting is that small privately held firms report relatively detailed financial accounts (Vanacker etal., 2017). Our results show that in models with main effects only there is no significant effect of leverage on sales growth and employment costs. However, when we add interactions between leverage and CBC, we find the expected negative relationship between leverage and sales growth as well as a positive relationship between leverage and employment costs for CCFs. The interaction term shows that the effect of 509 The Consequences ofFinancial Leverage: Certified B Corporations’ Advantages Compared to… 1 3 leverage is statistically significantly weaker for CBCs relative to CCFs. A graphical analysis of the interaction effect further illustrates that there is a negative relation between leverage and sales growth for CCFs but not for CBCs. Moreover, the positive relation between leverage and employment costs for CCFs does not extend to CBCs. Overall, these empirical results show that CBCs—unlike matched CCFs— do not suffer from lower sales growth or higher employment costs as leverage increases. Our study contributes to the CBC, business ethics, and finance literatures. First, we contribute to the burgeoning literature on CBCs. These studies have examined the motivations behind why firms become CBCs (Kim etal., 2016), their propensity to engage in diversification (Fosfuri etal., 2016), and their efforts to provide thought leadership on sustainability (Stubbs, 2017a). Additionally, studies have examined the implications of being certified as B Corp for firms’ engagement in prosocial activities (Conger etal., 2018), promoting certification (Gehman & Grimes, 2017), strengthening of CBCs’ sense of distinctiveness (Grimes etal., 2018), shifting entrepreneurial practices and orientation over time (e.g., Pollack etal., 2021; Sharma etal., 2018). Further, several studies have focused on the financial implications of being a CBC, specifically, how being a CBC affects growth and productivity (Chen & Kelly, 2015; Parker etal., 2019; Romi etal., 2018). To the best of our knowledge, we are the first to investigate the unique effects of CBCs’ financial structures versus those of the matched CCFs. Such an investigation is important because finance can be a key enabler, but also a possible constraint, for firms to realize their ambitions. Moreover, the literature on CBCs has focused on the advantages and disadvantages of certification. For example, B Corp certification permits firms to credibly communicate their social and environmental goals to customers, employees, and other stakeholders (Cao etal., 2017; Villela etal., 2021). Thereby, CBCs can more easily attract specialized resources, such as talented employees (Conger etal., 2018). However, others show that the B Corp certification entails internal re-organization costs and decreases short-term sales growth (Parker etal., 2019). We present a novel advantage of the B Corp certification that hitherto studies have not explored. We find that relative to CCFs, the B Corp certification “shields” CBCs from the negative effects of leverage. These findings are not driven by CBCs using less leverage. Indeed, CBCs have similar leverage ratios compared to their common commercial peers. These findings are important to the financial management of CBCs. Second, our study also generates important contributions to business ethics literature by extending knowledge on the consequences of “moral identity”. The concept of moral identity represents individuals’ commitment to behavior that fosters the well-being of others, which is also the basis for virtue and ethics at the organizational level (Weaver, 2006). Company leaders and employees make a moral identity choice when they decide to be members of CBCs, which challenges the ideology of shareholder value maximization (Kim & Schifeling, 2022). Extant research emphasizes that moral identity generates benefits, such as ethical decision making, community service, charity donations, and prosocial activities (Gu & Neesham, 2014; Neesham & Gu, 2015). A novel contribution from our study is that moral identity externalized via a B Corp Certification also brings benefits in return to CBCs. In this way, our study implies that business ethics has an important role in serving as a foundation for scholars to adjust finance theories to the context of CBCs. Specifically, our research suggests that scholars can contextualize theories by considering how the B Corp movement influences the moral identity and prosocial behavior of internal and external stakeholders who are committed to supporting the mission of B Corps. Additionally, our study contributes to prior research in the business ethics domain (Santos, 2012; Yitshaki etal., 2022) by showing that CBCs tend to have advantages despite focusing on value creation for stakeholders instead of capturing value for the company. Past research has highlighted the idea that social enterprises tend to generate positive externalities by maximizing on value creation while only satisficing on value capture (Santos, 2012). This is a critical point because the existing literature often defines social entrepreneurs as those focusing on creating social value (Yitshaki etal., 2022) rather than on capturing value for the organization. Our study brings a novel contribution to this literature by showing evidence that CBCs, even though they generate positive externalities, tend to have financial advantages. Consequently, a contribution that is new from our study is that researchers can develop theoretical expectations of financial advantages for social enterprises like CBCs even though their focus is not on value capture. Third, we contribute to the finance literature. Our study shows that the traditional theoretical perspectives from finance (e.g., Berk etal., 2010; Maksimovic & Titman, 1991)—that draw on the idea that people are self-interested actors that maximize their own personal economic gain— do not generalize to social hybrid firms, and CBCs more specifically. By contrast, our study shows that CBCs, which credibly signal their commitment to social and environmental goals (next to profit generation) to stakeholders, experience fundamentally different consequences of critical aspects of their financial structure. Overall, our study calls for more research that infuses an ethics perspective in the finance literature, and by doing so incorporates the reality that a growing group of firms have goals that transcend profit maximization but also focus on addressing social and environmental challenges “aimed at securing a good life” (and want to credibly commit to such goals). 510 I.Paeleman et al. 1 3 Theory andHypotheses The Effects ofLeverage: The “Stylized Facts” fromFinance Theory Debt financing has important implications for firms’ (prospective) customers and employees. If a firm takes on a loan, it has the legal obligation to make regular interest payments and pay back the principal. If the firm cannot meet these obligations, then it faces financial distress and might ultimately be forced into bankruptcy, which can lead to significant costs for customers and employees (Titman, 1984). However, when firms use equity, they are not legally obliged to pay dividends and cannot be forced into bankruptcy. So, why would entrepreneurs then use debt? First, entrepreneurs typically do not have sufficient personal funds to originate and grow their firms, and hence, access to debt financing is essential to realize their ambitions and/or their organization’s goals (e.g., Robb & Robinson, 2014; Siqueira etal., 2018). Second, for entrepreneurs, leverage brings additional personal benefits. For instance, interest payments shield firms’ profits from taxes (Vanacker & Manigart, 2010) that allows entrepreneurs to distribute more profits to themselves. Also, when entrepreneurs use debt, they need to contribute fewer personal funds. Accordingly, all else being equal, they can generate higher returns on their smaller equity contributions. Taken together, the costs and benefits of debt financing are different for entrepreneurs vis-à-vis their stakeholders, such as customers and employees. Leverage andSales Growth If a firm goes bankrupt, customers may, for example, (expect to) lose product support, warranties, and other contractual arrangements, and/or face higher maintenance costs (Hortaçsu etal., 2013; Titman, 1984). However, customers do not only experience significant disadvantages in case of bankruptcy. Customers may also experience disadvantages from higher leverage long before bankruptcy and even in cases when firms never go bankrupt. Maksimovic and Titman (1991) show theoretically that more highly leveraged firms have an incentive to decrease product quality, possibly even at the expense of losing reputation in the future. This effect is especially strong if a leveraged firm has problems meeting its debt obligations. In line with Maksimovic and Titman (1991), Matsa (2011) shows that higher financial leverage is associated with a decline in product quality in the supermarket industry. Kini etal. (2017) find that higher leverage is associated with more frequent product recalls, which are commonly due to safety defects. Because higher leverage can be associated with significant risks and costs for customers, they might refrain from doing business with highly leveraged firms. Moreover, less leveraged firms may aim to drive their more leveraged—and thus more vulnerable—competitors out of the market by aggressively advertising and/or temporarily underpricing their products (Chevalier, 1995). Thereby, they try to attract the customers of these firms. In line with these theoretical claims, Opler and Titman (1994) find that sales growth is 26% lower for the most leveraged firms compared to the least leveraged ones during industry downturns. So far the empirical research (e.g., Bae etal., 2019; Campello, 2006; Opler & Titman, 1994) has focused on analyzing the effects of leverage on publicly listed firms that are typically larger and more visible than private firms. So, why would (prospective) customers be aware of the leverage of the mostly private CBCs and CCFs studied in this paper? There are at least two reasons why: first, information intermediaries (e.g., the media, credit reporting agencies) often play an important role in bringing new information, such as a firm’s financial situation, to customers (Lee & Cho, 2005). For example, the Financial Times reports that firms especially monitor the credit scores of small vendors.2 The research on the failure process of small firms shows that many customers do proactively switch to competitors as the financial outlooks of firms decrease that thereby creates a vicious cycle for these firms by driving them into bankruptcy (Ooghe & De Prijcker, 2008). Second, even when customers are not aware of a firm’s financial health and leverage, they might experience some of the direct consequences of too much leverage such as lower product/service quality. Research has shown that customers react to service failures and lower quality product offerings (e.g., Sengupta etal., 2015). Importantly, our claims above do not require that all customers are aware of the firm’s exact leverage and related financial risk. However, a subset of customers is likely to have sufficient information to make inferences about the financial health of firms; and customers can experience some of the direct effects of high leverage (e.g., lower product/ service quality), that can influence their purchasing behavior. Taken together, a finance perspective highlights that high leverage can lead to substantial disadvantages for customers (including losing product support or decreasing product quality). Customers consequently become hesitant to purchase from highly leveraged CCFs that leads to lower sales growth. Further, competitors may also try to “steal” selfinterested customers from highly leveraged firms with better financial deals (or temporary underpricing) that further hampers sales growth. Therefore, we hypothesize: 2 https:// www. ft. com/ conte nt/ a9791 cc6482911e1b1b400144 feabd c0 opened on September 16, 2022. 511 The Consequences ofFinancial Leverage: Certified B Corporations’ Advantages Compared to… 1 3 Hypothesis 1 Leverage is negatively related to sales growth. Leverage andEmployment Costs A finance perspective further argues that as financial leverage increases and needs to be serviced, employers become more likely to not honor their implicit contracts with their employees. For example, firms with higher leverage ratios are less likely to invest in health and safety programs (Moussu & Ohana, 2016). Moreover, employees are severely affected by increased leverage because it raises the risk of financial distress and possible bankruptcy. Employees of distressed firms experience substantial earnings losses (Couch & Placzek, 2010) through (temporary) unemployment. They often need to relocate to different industries and suffer from earnings losses due to the loss of firm or industry-specific human capital. Graham etal. (2022) have estimated that employees’ total earnings losses from bankruptcy are on average about 67% of pre-bankruptcy earnings over the following seven years. Working at a more highly leveraged firm is hence riskier for employees. In their theoretical model, Berk etal. (2010) show that risk-averse employees require compensation for bearing this risk in the form of higher wages. Two empirical studies confirm the theoretical proposition of Berk etal. (2010). Akyol and Verwijmeren (2013) find that leverage is positively related to the average employee’s wage for a sample of publicly listed US firms and a sample of established privately held Dutch firms. Similarly, Chemmanur etal. (2013) show that leverage is associated with higher labor expenses in publicly listed US firms. One question is whether employees are aware of the leverage of a private firm (or, more broadly, its financial prospects). First, large-scale empirical evidence shows that employees often possess valuable information about the future outlook of their firm. Huang etal. (2020) analyze predictions of their firms’ business outlook by employees in Glassdoor.com and show that their outlook is informative in predicting future financial performance. They further show that employees’ outlook is especially good at predicting bad news. Second, privately held firms in Europe are required to report financial statements, and “many firms have labor representatives via a works council and/or unions who play an important role in informing employees” (Deloof etal., 2020, p. 191). Overall, employees may certainly not be aware of the exact leverage of their firms, but they are likely to be aware of the situation when leverage increases to a high level, and ultimately this is what matters for our above claims. Taken together, a finance perspective argues that employees in higher leveraged firms require higher wages, that increases firms’ employment costs, to compensate them for the higher risk. Thus, we hypothesize: Hypothesis 2 Leverage is positively related to employment costs. Why are CBCs Different? In the theoretical models from finance on which hypotheses 1 and 2 are based, (risk-averse) agents maximize their utility by optimizing their personal wealth (Berk etal., 2010; Titman, 1984). In contrast, entrepreneurs in social hybrid firms, such as CBCs, have important social and environmental goals along with profit generation—and explicitly aim to create a positive impact on society (Conger etal., 2018; Doherty etal., 2014; Moroz etal., 2018). Their customers and employees usually share these goals (Austin etal., 2006; Bianchi etal., 2020; Conger etal., 2018). Consequently, entrepreneurs in social hybrid firms and their customers and employees do not primarily obtain utility from the selfserving, individualistic behavior as described in traditional finance perspectives. Social hybrid entrepreneurs are more likely to direct “their efforts toward organizational, rather than personal objectives” and “place high importance on collaboration, trust in the community and a long-term orientation” (Short etal., 2009, pp. 175–176). Tina Bhojwani, co-founder and CEO of AERA—a CBC since 2021—, indicated that “A long-term vision of giving back to the community and society as a whole provides the greater purpose and increases both employee and customer loyalty.”3 We expect that the utility functions and behaviors of entrepreneurs, employees, and customers at CBCs are on average more strongly affected by social and environmental goals than those of stakeholders in CCFs, but there might be exceptions to that. Of course, there can also be firms, which have a strong focus on their social impact, but for some reason choose not to get certified. Consistent with the view that CBCs have an exceptionally strong social focus, Stubbs (2017b, p. 332) states that in CBCs, “profits are a means to achieve positive social and environmental ends” (Stubbs, 2017b, p. 332) but these firms also choose to be formally certified. B Corp certification is offered by B Lab that is a US-based not-for-profit organization that aims to transform “our global economy from a system that profits few to one that benefits all” and business into a “force for good” (B Lab, 2022).4 According to Jay Coen Gilbert, a co-founder of B Lab, certified B 3 https:// www. iwaym agazi ne. com/ blogs/ fashi on/ aeraear ns-bcor po rationcerti ficat ion opened on September 16, 2022. 4 https:// www. bcorp orati on. net/ enus/ movem ent/ about-blab/ opened on September 16, 2022. 512 I.Paeleman et al. 1 3 Corps “meet rigorous standards of social and environmental performance, legal accountability, and public transparency” (Steingard & Gilbert, 2016, p. 6). To become a CBC, firms need to (1) complete an impact assessment, (2) explicitly add their social and environmental goals to the charter, and (3) become a member and pay membership fees that depend on their sales (Romi etal., 2018). B Lab evaluates and audits the firm’s assessment, and if the firm credibly earns at least 80 out of 200 points, the certification is awarded (B Lab, 2022; Romi etal., 2018).5 This process can be very costly. It requires not only providing substantial documentation to and communication with B Lab but may also require operational changes like hiring new employees, changing suppliers or production processes, and consuming a large amount of managerial attention (Parker etal., 2019). Accordingly, B Corp certification is associated with a decrease in shortterm sales growth (Parker etal., 2019). Thus, this evidence raises the question of why firms choose to become B Corp certified. There are at least two reasons why: first, becoming a CBC strengthens the firm’s identification with its existing social and environmental goals and can lead to future improvements. Gehman and Grimes (2017) find that the most commonly stated reasons for becoming a CBC were that the certification was (1) aligned with the firm’s existing mission, values, purpose, or identity; (2) validated the firm’s sustainability commitment; and (3) helped firms to improve. Similarly, Conger etal. (2018) find that entrepreneurs view the certification as a “legitimating affirmation of the company’s prosocial efforts” (Conger etal., 2018, p. 8) Second, firms can use the certification as a credible signal of their social and environmental commitment to customers, employees, and other stakeholders (Parker etal., 2019). In Conger etal. (2018), for example, entrepreneurs report that B Corp certification helped them to attract talent. Overall, CBCs are a type of social hybrid firm (e.g., Moroz etal., 2018) that like other for-profit social firms aims to do good. In addition, however, CBCs have chosen to go through a costly certification process, which enhances their identification with their non-financial goals and signals the authenticity of these goals to their customers and employees (Chauhan & O’Neill, 2020). In line with their prosocial mission, CBCs founders’ and managers’, as well as employees’ and customers’ behavior, will be consistent with the intention to have a positive impact. The Different Effects ofLeverage inCBCs andMatched CCFs We expect that the effects of leverage in CBCs cannot simply be described by the standard predictions of the finance perspective that we used to develop hypotheses 1 and 2. Instead, we need to develop new hypotheses that incorporate the prosocial focus of CBCs and their stakeholders. Leverage andSales Growth inCBCs Versus CCFs Even if CBCs can also experience financial distress because of higher leverage, entrepreneurs should be less likely to abandon their firms even when that becomes financially optimal (Titman, 1984). Certainly, CBCs care about profit but it is unlikely a key motivator; rather, other elements such as “building a legacy”, “commitment to clients and community”, and “adding value to members” are key goals (Conger etal., 2018). These goals can only be achieved if the CBC continues to exist. Hence, we expect that the entrepreneurs of CBCs are oriented for the longer term to ensure their business remains operational, even if that is not financially optimal from their own perspective. Accordingly, customers of CBCs with higher leverage should be less concerned about the risk of losing product support or warranties. In contrast to profit-focused CCFs (e.g., Kini etal., 2017; Maksimovic & Titman, 1991), CBCs with higher leverage are less likely to decrease the safety or quality of their products or services, even if that is a financially optimal strategy. Decreasing safety or quality to maximize profits could be at odds with their non-financial goals of creating value for society and their customers (Conger etal., 2018). Thus, CBCs are expected to act as “stewards” toward their customers, and customers of CBCs need to be less concerned that the safety or quality of products will decrease as leverage increases. However, some CBCs may decrease that quality if it allows them to help more people. But, as we detail below, customers in CBCs may be more forgiving of such behavior. CBCs should also behave differently toward their “competitors” than predicted by standard models for CCFs that focus on maximizing financial value. The social value of CBCs activities can actually be greater if more organizations serve a certain need (Lumpkin etal., 2013). Aiming for a “sustainable solution” instead of a “sustainable advantage” for-profit social entrepreneurs should be more welcoming toward competitors (Santos, 2012, pp. 345–346). Lumpkin etal. (2013) point out that the nature of many social opportunities requires entrepreneurs to collaborate with various stakeholders, such as other for-profit social firms. Different from the behavior observed from profit-focused CCFs (Opler & Titman, 1994), CBCs are likely to not be inclined to use aggressive advertising or underpricing strategies to drive highly leveraged competitors out of the market to attract 5 https:// www. bcorp orati on. net/ enus/ certi ficat ion opened on September 16, 2022. 513 The Consequences ofFinancial Leverage: Certified B Corporations’ Advantages Compared to… 1 3 their customers. Such behavior would be at odds with CBCs’ non-financial goals and the necessary collaborative environment. Moreover, customers of CBCs, who share the same goals, can be more loyal and thus unlikely to switch suppliers for a better financial deal only. Furthermore, not only the entrepreneur’s but also the customer’s perspective is different in for-profit social firms. Customers of for-profit social firms value and share their suppliers’ social and environmental mission (Bianchi etal., 2020; Fosfuri etal., 2016). Therefore, instead of focusing only on their own interests, they might be inclined to act as stewards and keep supporting the business with their purchases when the leverage (and risk) of the firm increases. Research on Ben & Jerry—a CBC since 2012—shows consumers are two-and-a-half times more loyal to companies that have a social purpose and incorporate values-driven action authentically throughout their business (Wharton Social Impact Initiative, 2017).6 Thus, given the common social goals and importance of the long-term survival of the business, we expect that there is reciprocal support between customers and suppliers. Taken together, the classical predictions from the finance perspective are likely more pertinent to profit-focused CCFs and their customers. In these models, high leverage is increasingly expected to lead to substantial disadvantages for customers that make them hesitant to purchase from highly leveraged CCFs, which leads to lower sales growth. Further, competitors may also attract customers from highly leveraged firms with better financial deals like temporary underpricing that hampers sales growth. In contrast, taking a prosocial perspective, we expect that CBCs and their customers, who are more likely to have important, authentic social and environmental goals (Moroz etal., 2018) are less likely to engage in the same behaviors as described for their peers in CCFs. Thus, we hypothesize: Hypothesis 3 The negative relation between leverage and sales growth is weaker for CBCs than for CCFs. Leverage andEmployment Costs inCBCs Versus CCFs Employees in CCFs are typically focused on their financial compensation (Berk etal., 2010). However, employees in firms with social missions often “place considerable value on non-pecuniary compensation from their work” (Austin etal., 2006, p. 3). The firm’s social mission can act as a nonfinancial incentive for employees (e.g., Conger etal., 2018; Doherty etal., 2014). Preston (1989) develops a model in which employees at firms with social missions gain utility from their wages and the external social benefits generated by the firm. Past studies have measured the utility of employees by focusing on their satisfaction and well-being in social and commercial firms. Benz (2005) finds that employees are significantly more satisfied with their jobs in social rather than in CCFs. Binder (2016) even shows that working at social firms increases the well-being and life satisfaction beyond the work environment. We expect these effects to be particularly strong in CBCs as Chauhan and O’Neill (2020) find that certification further strengthens employees’ identification with the CBCs’ goals. One of the employees in the study even reported that B Corp certification was a reason she chose to work for that specific firm because “in the world of very murky definitions of social impact, B Corp is a guarantee that (…) investments are (…) not just socially responsible, but (…) impactful” (Chauhan & O’Neill, 2020, p. 23). Overall, taking a prosocial perspective, non-pecuniary motives, that is, the aim to do good for society and the environment, are primary motivators for CBCs and their employees. Employees in CBCs have reason to expect that their employers will act as stewards and take their situation into account in financial decisions. Therefore, employees in CBCs are less likely to be risk-averse and wage-focused as predicted by financial theories and that have been observed in CCFs (Berk etal., 2010). Thus, we hypothesize: Hypothesis 4 The positive relation between leverage and employment costs is weaker for CBCs than for CCFs. Method Data Sources andSample To test our hypotheses, we used a sample of European privately held CBCs and matched CCFs. The final dataset was a combination of data from data.world and Orbis Europe. First, we consulted the B Corp Impact Data that were made available by B Lab on data.world (https:// data. world/ blab/bcorpimpactdata). B Lab confirmed to us that its data comprised the population of all CBCs in Europe. We identified 548 European CBCs that were initially certified between 2013 and 2018. These firms were active in 21 European countries.7 We only selected European countries with more 6 https:// socia limpa ct. whart on. upenn. edu/ news/ podca stbenjer rysrobmicha laktalkssocialmissi ondolla rschange/ opened on September 16, 2022. 7 These 21 countries are Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. 514 I.Paeleman et al. 1 3 than 10 CBCs to ensure a sufficient number of firms within each country.8 This step eliminated only 36 firms. Second, as the B Corp Impact Data only provided the names of CBCs, we hand collected relevant company identifiers, such as registration numbers, by looking at the respective websites of CBCs and sometimes contacting them to get more identifier information. Based on the identifiers, we used the Orbis Europe database in the next steps. This database was compiled by the Bureau van Dijk (BvD), which is a Moody’s Analytics company and is one of Europe’s leading electronic publishers of business information (Paeleman & Vanacker, 2015). The Orbis Europe database comprised financial data for publicly and privately held European firms. BvD collected information from sources that included official registers and regulatory bodies (e.g., Companies House in the UK), annual reports, private correspondence, firm websites, and news reports. BvD harmonized the financial accounts to enable accurate cross-country comparisons. Third, to focus as clearly as possible on the different effects of leverage on CBCs versus CCFs, we used matched pairs. The sample of CBCs was matched by hand on a oneby-one basis to similar CCFs based on characteristics as of the year of B Corp certification (the CBCs in our sample are for the first time certified in the period 2013–2018). Specifically, for each CBC, we searched in the Orbis Europe database for a similar CCF in the year of certification. We used four matching criteria (e.g., Puri & Zarutskie, 2012; Siqueira etal., 2018). First, both firms needed to be active in the same country, second, in the same three-digit industry (using the NaceRev 2 industry classification), third, founded in the same year, and finally, we also required that the firms are of a similar size (i.e., total assets). We first collected the information on these characteristics for the CBCs and then we searched for a similar CCF. The matched sample approach allows us to avoid that trivial differences between CBCs and CCFs drive our findings. As King and Nielsen (2019, p. 2) detail, the matched sample approach improves our ability to draw causal inferences from real-life data, because the matching process “...amounts to a search for a data set that might have resulted from a randomized experiment but is hidden in an observational data set. When matching can reveal this “hidden experiment,” many of the problems of observational data analysis vanish”. This step resulted in omitting 194 CBCs as we did not have details on all these a priori defined characteristics for these firms. For 318 CBCs, we found a similar CCF. Further, we required that firms had reported basic accounting data to construct our variables. In some European countries, the smallest firms were required to report an abridged balance sheet but were not necessarily required to provide a detailed profit and loss account. This requirement meant we then lacked data on sales and employment cost. Moreover, to mitigate any issues of decertification and recertification, we focused on the year of initial certification only. In the final models, we ensured that each CBC had a matched CCF. This resulted in a final sample of 136 CBCs and 136 matched CCFs from six European countries (Italy, Spain, France, the United Kingdom, Portugal, and Germany).9 All 272 firms were privately held firms. Our final CBC sample represented 25% of the European CBC population (initially certified between 2013 and 2018). A list with the names of the CBCs in our sample is presented in online Appendix1. Table1 has a summary of the key descriptive data on the matching criteria. Table1 shows that there are no significant differences in country distribution, industry distribution, year of certification, and age and size in the year of certification (i.e., the year of matching) between CBCs and the matched CCFs. Variables Below, we define the variables used in this study. Table2 gives the descriptive statistics for all variables (except for industry and year dummies) and shows the tests on whether the means differ between CBCs and CCFs. Dependent Variables To test Hypothesis 1, we measure sales growth as the total sales in year t divided by the total sales in year t-1 (e.g., Zheng etal., 2015). This measure reflects the market acceptance of a firm’s products. An increase (decrease) in sales growth shows that customers increasingly purchase (abandon) the firm’s products (Bae etal., 2019). Table2 shows that sales growth is rather high in our full sample at 73% but with significant variation in which some firms have much lower growth rates, while others have very high growth rates. Table2 also shows that there are no significant differences in sales growth between the subsamples of CCFs and CBCs. This finding is interesting because scholars have argued that some CBCs are not fundamentally concerned about “growth”. Furthermore, sales growth could be important because it reflects the CBCs’ ability to scale their solutions to address grand challenges, and a sales decrease is a strong indicator of customer-driven losses that indicates a decreasing impact of CBCs. 9 Other European countries with more than 10 B Corps were the Netherlands and Switzerland. We did try to collect data of the B Corps in these countries. However, none of them reported the basic data that was needed for this study. 8 Countries with the minimum of 10 B Corps are France, Germany, Italy, Netherlands, Portugal, Spain, Switzerland, and the United Kingdom. 521 The Consequences ofFinancial Leverage: Certified B Corporations’ Advantages Compared to… 1 3 should also investigate the specific sources from which CBCs raise debt financing, including banks, crowdfunding, microfinance, and peer-to-peer approaches (Bruton etal., 2015) to facilitate the attainment of their goals. Finally, the COVID-19 pandemic also provides an interesting opportunity for future research. A question would be to what extent CBCs are better insulated from the negative consequences of the COVID-19 pandemic compared to CCFs. Contributions forPractice Following the growing number of CBCs, new financial instruments to support these socially responsible for-profit firms have become important at the firm, cross-sector, and policy levels in different countries (Bruton etal., 2015). For instance, at the firm level, the Force for Good Fund associated with the online crowdfunding platform WeFunder invests in “Best for the World” CBCs that score in the top 10% of CBCs worldwide (Force for Good Fund, 2019).12 At the cross-sector partnership level, one example is Trivident that is a Flemish Equity Fund for social firms founded in 2001 by social economy actors, the government, and the private sector. At the policy level, the European Union Programme for Employment and Social Innovation has been promoting firms whose design is sustainable to address society’s challenges and financial solutions (Book of Goodbiz, 2018).13 However, there is limited research to inform the development of financing solutions tailored to socially responsible for-profit firms like CBCs. This study provides new knowledge to help practitioners develop new financial solutions for for-profit social firms. Our study shows that CBCs have more favorable consequences from leverage than their common commercial counterparts. Based on our findings, bankers and other financial capital providers involved in the rise of social investing (Yan etal., 2019) should become more aware of the opportunities to serve the segment of for-profit social firms, such as by designing loans and investment options for CBCs, given that they tend to be protected from the adverse effects of higher leverage. Overall Conclusion This study examines the consequences of financial leverage in CCFs versus CBCs. We show that CBCs experience less adverse effects from higher leverage, such as lower sales growth and increasing employment costs, than CCFs. Accordingly, the CBCs category is better protected from the expected negative effects of higher leverage than CCFs. In this way, our findings further show that stakeholders support the B Corp certification. Supplementary Information The online version contains supplementary material available at https:// doi. org/ 10. 1007/ s1055102305349-5. Acknowledgments We are very grateful to the editor and anonymous reviewers of the paper for all their encouragement, support and very constructive feedback, from which the paper has immensely benefited. We would like to additionally acknowledge the helpful comments of participants at the 2019 Sustainability, Ethics & Entrepreneurship Conference (Miami) and the 2022 EntFin Conference (Bath). Funding Ine Paeleman acknowledges the financial support of Antwerp University Research Fund (BOF) and Research Foundation Flanders (FWO) (Grant W0.023.19N). Data availability Data relevant to this study is available upon reasonable request. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. 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