Financial distress cost of Italian small and medium enterprises

Abstract

Purpose This paper aims to propose a theoretical model designed to predict the likelihood of financial distress of an enterprise and to quantify the damages whenever the financial crisis became full-blown. Design/methodology/approach Coherently with the objectives of the paper, the analysis considers the last seven exercises (period: 1999/2006) of a sample of 25.000 small- and medium-sized enterprises (SMEs) (volume of sales: < 20 mlns; number of employees: < 250) organized in the form of Ltd. The empirical investigation has been affected through the use of BvD database: Aida and Mint Italy. Findings The analysis shows that the ex post costs of financial distress decrease in relation to the company’s increased ability to use intangible assets and in relation to the local roots of the banks (local banks rather than international banking groups). Research limitations/implications The instruments used for this study need to be subjected to more statistical tests to establish a more robust validity and reliability. Replication of this study using larger samples and a broader geographic base (extended at European level) is suggested. Practical implications The timely monitoring of investigated variables allows you to mitigate the costs of exit from the market. Originality/value Following the global financial crisis, this paper sheds new light on the financial distress cost of Italian SMEs.

Financial distress determinants among SMEs: empirical evidence from Sweden

“…The relationship between firms' prior financial condition and their current financial distress is consistent with H4 and the findings of Campbell et al (2011) and Konstantaras and Siriopoulos (2011). However, the finding that low financial leverage is related to financial distress is in contrast to H3 and previous findings reported by Gruszczynski (2004), Konstantaras and Siriopoulos (2011), Kim and Upneja (2014), Mselmi et al (2017), andQuintiliani (2017). The present findings suggest that firms with better access to external financing seem to have better abilities to have higher financial leverage and are therefore less likely to face financial distress.…”

“…Several previous studies have documented the link between a firm's financial structure in terms of leverage and its financial distress (Gruszczynski, 2004;Konstantaras and Siriopoulos, 2011;Kim and Upneja, 2014;Mselmi et al, 2017;Quintiliani, 2017). These studies suggest that under certain circumstances, a firm's financial distress probability increases as its financial leverage increases.…”

“…Hence, macroeconomic conditions such as a financial crisis are expected to affect a firm's financial aspects and therefore its financial distress (Tinoco and Wilson, 2013;Bhattacharjee and Han, 2014;Kim and Upneja, 2014). This macroeconomic effect on firms' financial distress is supported by Madrid-Guijarro et al (2011) and Quintiliani (2017), leading to the following hypothesis: H1. Firm financial distress is expected to increase during a financial crisis.…”

“…It is also well known that, regardless of their business environment (i.e. industry and country), they typically face financial constraints and have a high probability of bankruptcy (Quintiliani, 2017;Yazdanfar and € Ohman, 2018). The reasons why SMEs face financial constraints can be firm-specific (Yazdanfar, 2011) or related to macroeconomic conditions, such as the 2007-2009 global financial crisis (Corazza et al, 2016).…”

“…The findings also illustrated the impact of interest rate instability and institutional effects. Quintiliani (2017) developed a theoretical model to predict the likelihood of firm financial distress and to quantify the related costs whenever a financial crisis became full blown using a sample of 25,000 Italian SMEs for the 1999-2006 period. Based on several statistical methods, including generalized methods of moments and robustness tests, the results indicated that the ex post costs of financial distress increased relative to the SMEs' decreased ability to use intangible assets and relative to the local roots of the banks as financial partners.…”