3. Italy as Context of Analysis
Any research into the Italian economy must take into account the distinct features of Italian
industrial and financial structure. In Italy, there is a high concentration of small and opaque firms wellsuited for testing theories concerning asymmetric information. While the proliferation of small-scale
enterprises has often been pointed to as one of the reasons for Italy’s economic success, the limited
types of external funds available to Italian companies make them prone to financing constraints.
Italian
small firms are financially vulnerable because of their dependency on financial institutions for external
funding. In this as in other bank-based countries, financial institutions have a significant impact on the
supply of credit available to small businesses to support their growth.
Capital markets in Italy are relatively undeveloped compared not only to those in the US but also,
to some extent, to those of other large European countries. Although Italy has a bank-oriented financial
system, the Italian banking system, until very recently, was not allowed to hold equity in companies
and was mostly state-owned and heavily regulated, which limited its effectiveness. Very few
companies in Italy have publicly traded corporate debt. Bank debt is by far the most important source
of outside funds for Italian firms, and bank loans are the largest net source of external financing. Due to
the lack of transparency regulations and high information asymmetries,
the contract’s costs between
borrowers and lenders are high. Non-bank sources of debt, other than trade credit, are few. In
relationship-based lending, such as often occurs in Italy, banks acquire information over time through
contact with the firm, its owner, and its local community, and they use this information to decide on the
availability and terms of credit to the firm.
The institutional framework of the Italian financial system, marked for a long time by a very
restrictive regime in terms of the geographical mobility of banks (Alessandrini and Zazzaro 1999). As
regards their operative sphere, and the structure of Italian industry, which is largely based on networks
of small and medium firms, have made the local bank a primary actor in the development of local
economies (Banca d’Italia 2008). A significant disparity exists among different macro-areas in the
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country. In particular, the South of Italy is characterized by underdeveloped and inefficiency in the
financial system as well as in the enforcement system. In this case a poor institutional environment is
provided especially for small and medium-sized firms.
By taking these financial and industrial features of Italy into account it is evident the role of the
institutional context in affecting financing decisions for small and medium-sized firms. In light of these
arguments, Italy represents an interesting case study. Italy has a financial system that is highly
integrated with international financial markets; however, the level of efficiency of the financial system
among regions is different (Guiso et al. 2004). Moreover, although Italy has a perfectly integrated
market from a legal and regulatory point of view and the same laws apply throughout the country, the
enforcement system differs at local level (Bianco et al. 2005).
Furthermore, Italy is appropriate for this
kind of study because its economy is dominated by small and medium-size firms that do not have the
possibility to overcome local constraints by expanding nationally or internationally. Thus, Italy
provides an ideal laboratory to test the effect of institutional factors on capital structure.
4. Methodology and Data
4.1 Sample
Guiso (2003) highlighted the fact that Italy has many more small businesses than found in
countries at similar stages of development. Kumar et al. (1999) noted that the 3.2 million firms in Italy
have an average of 4.4 employees whereas the average firm size, measured by the number of
employees, in Germany, France, and the UK is respectively 10.3, 7.1, and 9.6. In Italy, firms with less
than 100 employees account for close to 70% of total employment, while in Germany, France, and the
UK such firms do not contribute more than 30% to employment.
As discussed above, small businesses strictly depend on external finance and, at the same time,
are vulnerable to asymmetric information problems. They can thus be constrained by leverage
decisions. For this reason, capital structure is a relevant topic for small firms, because it influences their
growth patterns. In Italy, credit availability has a strong impact on the growth potential of small firms
and on the creation of new ones (Zingales et al. 2004). Therefore, small and medium-sized Italian firms
provide an interesting case-study to analyze the relationship between asymmetric information, growth
cycle, and capital-structure decisions.
The sample employed in the study was stratified according to the
definition of small and medium-sized firms, defined by EU criteria and based on information obtained
from the database13. The AIDA (Analisi Informatizzata Delle Aziende) database, collected by Bureau
13 Data were obtained for firms with less than 250 employees and total sales of less than €40 million.
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Van Dijk, was used in selecting the companies comprising the study sample. A panel-data analysis was
carried out to empirically examine the previously described hypotheses14. The panel sample was made
up of 10242 Italian non-financial small and medium-sized firms not involved in a bankruptcy process;
the period studied was from 1996 to 2005. The dataset was restricted to observations that embodied all
essential variables for which a record of at least 5 years over the study period was available. The
number of firm-year observations was well-balanced across the sample. All of the variables used in the
study were based on book values.
