Capital structure: The Italian market perspective

Abstract

This article first investigates the determinants of "capital structure" and the extent to which financial structure policy contributes to the creation of shareholder value in Italian companies through a survey of 76 CFOs of Italian listed non-financial companies, and revealed that the key driver is the quest for financial flexibility, necessary to combine effectively capital structure policy with the other two levers of value creation, investment policy and payout policy. These three value creation drivers are autonomous, but this empirical study reveals a clear hierarchy that links liability policy (capital structure and payout) to asset policy (investments) leading companies to make sub-optimal financial structure decisions that may not minimize the weighted average cost of capital, though ensuring the financial flexibility necessary to activate their principal lever of value creation, investment policy, effectively and without excessive constraints. A major finding in a subsequent benchmarking exercise is that Italian "family capitalism" affects corporate governance and therefore capital structure decisions. This finding may not be restricted to the Italian market, but could apply to all countries in which ownership structures are centered on very few shareholders with weak financial market control and where banks often play a crucial role in the governance of companies.