When financial distress strikes: when and how firms initiate insolvency proceedings

This study provides new evidence on the functioning of insolvency procedures in Italy, with particular attention to joint composition with creditors. By combining administrative data from Infocamere, INPS, the Central Credit Register, and Cerved, we examine the characteristics of firms undergoing insolvency proceedings, the sequence of events preceding their initiation, and their subsequent outcomes. Only a portion of insolvent firms make use of collective procedures to exit the market, and these firms were typically already in distress for a prolonged period prior to initiating the procedure - even more so those entering judicial liquidation. Firms admitted to the joint composition with creditors, although far fewer in number than those subject to liquidation, tend to be larger and display significant exposure to the banking system. In this paper, we discuss the objectives of joint composition with creditors, its success rate when the goal is business continuity, and the effects of recent regulatory changes. The timeliness of the filing for joint composition with creditors is positively correlated with the probability of successful restructuring and of firm's return to financial and economic soundness.