Sub-theme 2.1. Cost of capital and financing in social enterprises

Sub-theme 2.1. Cost of capital and financing in social enterprises

A fundamental issue remains unresolved with a view to understanding funding of social enterprises: there is no financial economic theory, comparable to the very developed theory concerning for-profit organizations, to understand the cost of equity of these organizations. One reason for this might be the fact that theorizing on the cost of equity involves more dimensions than only profits or even financial viability, as funders also attach importance to the organization’s activities, making modeling more complex. The cost of equity therefore goes beyond a purely financial approach, implying trade-offs between funds and mission, implying the possibility of mission drift.

So, a first aim of this sub-theme is to develop building blocks of a coherent financial theory specifically geared towards social enterprises. Generally speaking, the impact of having a utility function of potential funders containing a financial argument and a mission-related argument is to be explored, in a way formally comparable to the traditional risk-return approach for for-profit firms, but very different as far as interpretation is concerned, also because arguments of financial diversification by investors do not have any relevance in the present context. Taking into account decision-making as to debt-taking, including constraints resulting from agency problems between potential lenders and the organization, a number of hypotheses as to funding and the possible impact on organizational behaviour are to be derived and tested. High-quality financial data, covering medium or longer periods of time, are available for Belgium and the US, but these of course do not cover organizational behaviour and strategy. In order to be able to design a relevant and unambiguous questionnaire to complement the financial data, preliminary case studies are to be performed in a few social enterprises for which we can obtain reliable financial data.