The Effects of Organized Crime on Distressed Firms

Abstract

This study captures the presence of organized crime groups in the Italian territories and examines their relationship to firms that are in a condition of financial distress. At the end of the nineteenth century the first criminal groups emerged in the South of Italy as a response to the demand for private protection by local landlords. Using firm-level data and detailed information on organized crime activities, this paper tests the hypothesis that organized crime groups support financially distressed companies by supplying them with private protection in the form of access to credit. The results show a higher concentration of distressed firms in regions with a high presence of organized crime groups. The relationship is further tested by the introduction of a novel instrument that exploits unique data on episodes of family-related homicides that have been investigated since the 1990s.

Keywords: organized crime, distressed firms, institutions

JEL Classification: O17, O43, G33, R11