Financial Policy and Local Development in SMS' Italian Firms

Abstract

The present study explains both capital-structure and debt-maturity choices for small and medium-size Italian firms in terms of institutional differences at the local level, taking into consideration local financial development, the effectiveness of the local enforcement system, and other firm-specific characteristics. The ability of the local financial market to efficiently provide funds is of particular interest to small and medium-sized firms, due to the fact that large firms can tolerate imperfections in the local financial system by moving to international, more highly integrated financial markets. The empirical analysis is strictly based on the indicator created by Zingales et al. (2004) while the methodological approach is similar that of Barclay et al. (2003). The main findings of the analysis suggest that capital-structure and debt-maturity choices interact with each other and that corporate financial decisions are not only the result of firm-specific or industry-specific characteristics but are also based on the institutional climate in which a firm operates. In contrast to Barclay et al. (2003) and to reports in the Italian literature, the results of the analysis showed that leverage and debt-maturity are directly related as complementary factors. After controlling for the heterogeneity in a firm's characteristics, leverage was found to be positively influenced by local financial development while the enforcement system was less relevant. Conversely, debt maturity was longer in regions with high enforcement of the law, whereas local financial development did not play a relevant role. Other interesting findings about the role of credit worthiness, measured through the corporate financial rating, are also discussed.