Organized Crime and Firms’ Financial Statements: Evidence from Criminal Investigations in Italy

71 Pages Posted: 6 Sep 2017 Last revised: 3 Mar 2021

See all articles by Pietro A. Bianchi

Pietro A. Bianchi

Florida International University (FIU)

Antonio Marra

Bocconi University - Department of Accounting

Donato Masciandaro

Bocconi University - Department of Economics

Nicola Pecchiari

Bocconi University - Department of Accounting

Date Written: February 26, 2021

Abstract

We investigate how connections to organized crime manifest on firms’ financial statements and analyze the impact of these connections on firm performance outcomes. Using a unique dataset that identifies Italian firms connected to organized crime, we find that connected firms have lower profitability, even though they report higher sales and lower labor cost. Connected firms also have higher bank debt, report lower cash holdings, experience quicker operating cycles, and are more likely to file for bankruptcy. Further, we find that connected firms are more tax aggressive and engage in downward earnings manipulation. To corroborate our results, we exploit an amendment to the Italian Anti-Money Laundering regulation as a shock to the extent to which criminal organizations could expropriate connected firms’ resources through money laundering. Our collective evidence suggests that connections to organized crime can drain a firm’s resources, possibly through money-laundering schemes, and jeopardize its existence, thereby harming its shareholders.

Keywords: organized crime, money laundering, director criminal record, private firms

JEL Classification: G30, G34, G38, K42, K49

Suggested Citation

Bianchi, Pietro A. and Marra, Antonio and Masciandaro, Donato and Pecchiari, Nicola, Organized Crime and Firms’ Financial Statements: Evidence from Criminal Investigations in Italy (February 26, 2021). Bocconi Legal Studies Research Paper No. 2017-59, Available at SSRN: https://ssrn.com/abstract=3031747 or http://dx.doi.org/10.2139/ssrn.3031747

Pietro A. Bianchi

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Antonio Marra

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Nicola Pecchiari

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

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