Local financial development and cash holdings in Italian SMEs

Abstract

In this article, we investigate the effect of local financial development on cash holdings of Italian small and medium-sized enterprises (SMEs). Consistent with the hypothesis that local financial development reduces the need to hold precautionary cash because it facilitates access to bank debt, we find that local financial development measured by the density of bank branches in Italian provinces has a negative effect on corporate cash holdings. This effect is driven by SMEs with bank debt. Furthermore, the negative effect of local financial development on cash holdings only exists for younger and smaller SMEs, which are more likely to benefit from increased local financial development. Our work highlights that local financial development is an important driver of policies on holding cash by SMEs and is particularly relevant during crisis periods, such as the recent COVID-19 crisis.

Does a country's environmental policy affect the value of small and medium sized enterprises liquidity in the energy sector?

“…Moreover, it is likely that, in a country where energy projects have a great chance of success, banks and other financial intermediaries are more willing to finance energy SMEs. Thus, in line with our findings, it is reasonable that cash, which is a substitute for debt (Fasano & Deloof, 2021), is less relevant in such contexts.…”

“…Such tools could act as a substitute for cash holdings to make new investments, for which cash reserves would be less relevant to corporate performance. Moreover, in a country where the investing opportunities are abundant, banks and other financial intermediaries may be more likely to provide debt as a substitute for cash (Fasano & Deloof, 2021), which is also more valuable for energy SMEs embedded in countries where the environmental performance is high (Cariola et al, 2020). In line with this, Li et al (2021) find that in an institutional context that pays more attention toward environmental issues, the cost of debt is lower.…”

Local versus national banking development in Europe: who is the winner?

“…Therefore, the banking development of the geographical area where a SME resides increases the availability of financial resources, since bank branches can easily obtain deep information and reduce information asymmetries. Additionally, the negative coefficient of the variable Cash Holdings confirm that European SMEs use financial borrowing as a substitute for cash (Fasano & Deloof, 2021 ). The findings corroborate those of La Rocca et al ( 2010 ) and Alessandrini et al ( 2009a ).…”

“…Although the test suggests the absence of an endogeneity issue, we also checked whether the results were still valid when controlling for this kind of bias by using the 2SLS technique. As previous studies based on Italy have settled endogeneity problems using regressions with instrumental variables (IV), we run 2SLS regressions on Italy using the same IV as in Guiso et al ( 2004 ), La Rocca et al ( 2010 ) and Fasano and Deloof ( 2021 ), who all measure local banking structures in 1936. 21 The output of the 2SLS model, even if based on a single country, confirms our findings, as the regression results do not show substantial differences in terms of magnitude and statistical significance compared to our main model (results are available upon request to the authors).…”

“…Finland has historically had a large number of bank branches related to its population (Zardkoohi & Kolari, 1994 ), while it is now experiencing a period of high development of fintech that could change the role of branches (Hundal & Zinakova, 2021 ). Finally, in Italy national banks dominate the market, but local banks also have an important role in the banking system (Fasano & Deloof, 2021 ). All these arguments shed light on the fact that the local banking sectors differ from country to country, but also national banking policies vary, with central banks and banking headquarters that have to deal with the characteristics of the nation to which they belong, suggesting the relevance of studying the impact of LBD for firms and the moderating role of NBD.…”