3. Italy as Context of Analysis Any research into the Italian economy must take into account the distinct features of Italian industrial a...
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 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.
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