No. 590 - Firm undercapitalization in Italy: business crisis and survival before and after COVID-19

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by Tommaso Orlando and Giacomo RodanoDecember 2020

The paper examines the diffusion of undercapitalization (equity below the legal limits) among Italian firms. It describes the magnitude and persistence of the phenomenon in Italy in the years 2010-18 and analyzes the relationship between undercapitalization, bankruptcy and business termination. It evaluates the potential effects of the COVID-19 epidemic and its consequences for the new early warning system, that will become operational in September 2021.

In 2010-18, around 8.5 percent of Italian companies were undercapitalized. The onset of undercapitalization often anticipates business termination: around 60 percent of involved firms go out of business within 3 years. Even considering the mitigating role of government interventions, the COVID-19 epidemic might lead to a sensible increment in the rate of undercapitalization in 2020. As a consequence, early warning procedures may face operating difficulties.