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Firm undercapitalization in Italy: business crisis and survival before and after COVID-19

Author

Listed:
  • Tommaso Orlando

    (Bank of Italy)

  • Giacomo Rodano

    (Bank of Italy)

Abstract

In a context characterized by upcoming regulatory changes and deeply affected by the COVID-19 epidemic, this paper examines the diffusion of firm undercapitalization (i.e., the firm displaying a level of equity below the legal limit) among Italian corporations. In a proposal by the National Board of Accountants, business crisis is substantially identified with undercapitalization. Indeed, our analyses show that the onset of undercapitalization often anticipates business termination: around 60 percent of involved firms go out of business within 3 years. In 2010-18, on average around 8.5 percent of Italian companies were undercapitalized. The impact of the COVID-19 epidemic may be substantial: our predictions indicate that the share of undercapitalized firms at the end of 2020 may exceed 12 percent. This estimate incorporates the powerful mitigating effects of several interventions enacted by the Italian government between March and August 2020 to support firms damaged by the pandemic. The increase in undercapitalization may reverberate onto the functioning of the new ‘early warning’ system, which will become operational in September 2021: our predictions suggest that the number of firms that could be involved in early warning procedures may be almost twice as large as that foreseeable on the basis of accounting data from 2018.

Suggested Citation

  • Tommaso Orlando & Giacomo Rodano, 2020. "Firm undercapitalization in Italy: business crisis and survival before and after COVID-19," Questioni di Economia e Finanza (Occasional Papers) 590, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_590_20
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2020-0590/QEF_590_20.pdf
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    More about this item

    Keywords

    firm undercapitalization; equity deficit; early warning; impact of COVID-19 on Italian corporations;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K29 - Law and Economics - - Regulation and Business Law - - - Other

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