Is It Worth Having the Sopranos on Board? Corporate Governance Pollution and Organized Crime: The Case of Italy

We examine the corporate consequences of having board directors connected with the organized crime. Given that in principle such as connections can trigger both pros and cons, the question is genuinely empirical: using an original data base of Italian corporations (108,332 observations for the period 2006-2013) we offer two results. On the one side, we find that firms with at least one director, whose criminal record displays potential involvement with criminal organizations (i.e., tainted director), show lower levels of cash holdings and lower profitability. Two alternative explanations can be offered: the firms are likely to use financial policies to lower cash holdings, thereby reducing the risk of being expropriated by tainted directors; the firms are completely captured by such as directors, that use the corporations for money laundering purposes, and therefore manage the cash holdings in order to minimize the risk of detection. On the other side, the firm profitability is inversely associated with the presence of tainted directors, suggesting that the tainted directors can use firm resources for their own private benefits, which harms the firm profitability. Results from this study are informative to regulators, policy makers and politicians, interested in preventing the pollution of criminal organizations in the legal economy.