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.
