Firm Undercapitalization in Italy: Business Crisis and Survival Before and After COVID-19

35 Pages Posted: 14 Apr 2021

Date Written: December 23, 2020

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.

Keywords: firm undercapitalization, equity deficit, early warning, impact of COVID-19 on Italian corporations

JEL Classification: G32, G33, K29

Suggested Citation

Orlando, Tommaso and Rodano, Giacomo, Firm Undercapitalization in Italy: Business Crisis and Survival Before and After COVID-19 (December 23, 2020). Bank of Italy Occasional Paper No. 590, Available at SSRN: https://ssrn.com/abstract=3826464 or http://dx.doi.org/10.2139/ssrn.3826464

Tommaso Orlando (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giacomo Rodano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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