A revision of Altman’s Z- Score for SMEs: suggestions from the Italian Bankruptcy Law and pandemic perspectives

As the pandemic urged further investigations on the prediction of firms’ financial distress, this study develops and tests an alternative measure to the alert system elaborated by the NCCAAE which combines the benefits of the Z-score’s multivariate discriminant model with the background employed to develop the NCCAAE’ predictors. Using a sample of 43 viable and 43 non-viable Italian SMEs, we first compare the financial distress predictive accuracy of the NCCAAE’s alert system to that of the traditional Z-score over the period 2015-2019. On the basis of the results, we elaborate and compare the revised versions of both approaches which align the traditional Z-score to the current socio-economic conditions and provide an alternative measure to the NCCAAE’s alert system which embeds a Z-score calculated using the ratios elaborated by the NCCAAE for the alert system. The analysis of the two baseline approaches showed complementary results as the Z-score overperformed the alert system when predicting the status of non-viable firms whereas the opposite emerged as regards viable firms. The revised version of both approaches pointed out an enhanced predictive accuracy with respect to baseline models. In particular, the complementary role of the Z-score has been integrated into the new alert system as major contribute to its enhancement which pointed it out as the best measure employed. We, therefore, contribute to the literature studying the financial distress prediction developments by elaborating an alternative measure to the alert system developed by the NCCAAE which combines the benefits of the Z-score’s multivariate discriminant function with the background employed to develop the NCCAAE’ predictors. Our analysis enriches the post-pandemic debate on refined financial distressed prediction methods by pointing out the limits of the alert system as designed by the NCCAAE and suggests an alternative and better performing measure that may be used by third-party bodies to predict financial distress

Does Gender Diversity in the Workplace Mitigate Climate Change?

We match firm-corporate governance characteristics with firm-level carbon dioxide (CO2) emissions over the period 2009-2019 to study the relationship between gender diversity in the workplace and firm carbon emissions. We find that a 1 percentage point increase in the percentage of female managers within the firm leads to a 0.5% decrease in CO2 emissions. We document that this effect is statically significant, also when controlling for institutional differences caused by more patriarchal and hierarchical cultures and religions. At the same time, we show that gender diversity at the managerial level has stronger mitigating effects on climate change if females are also well-represented outside the organization, e.g. in political institutions and civil society organizations. Finally, we find that, after the Paris Agreement, firms with greater gender diversity reduced their CO2 emissions by about 5% more than firms with more male managers

The impact of ECB loan valuation metrics on third-party loan pricing: A EU firm perspective

This paper delves into the implications for the bank behaviour about firm loan pricing conditions of the new direction undertaken by supervisory and regulatory authorities in the aftermath of the deterioration of the loan portfolio quality that hit EU banks. The 2014 AQR exercise embraces the new direction and extensively uses debt service coverage measures to assess a firm’s loan quality. We, therefore, check whether the DSCR has influenced debt pricing conditions by analysing a panel of 655 listed EU firms from 2009 to 2017. Our findings show that Z-score is unable to discriminate between high and low credit risk firms. The DSCR becomes significant only after 2014, highlighting the incremented importance of this ratio in the bank’s loan pricing determination. Our work contributes to the literature investigating third-party interdependencies with the interplay between lender-borrower relationship and loan pricing and further extends the literature on creditworthiness metrics beyond their mere default-prediction ability (Beaver, 1966; Houghton & Woodliff, 1987). Our results highlight the relevance of the DSCR in the bank’s loan pricing determination and inform firm managers about the drivers that influence the cost of debt thereby enhancing their operational and financial planning

Essays on the Credibility of Bail-in

This thesis groups three empirical papers on the topic of the bail-in regime. The leitmotiv that links all three papers is bail-in credibility, namely the perception of market participants about the effectiveness of the bail-in regime. Bail-in credibility is crucial for the bail-in regime to take hold as puzzling rules may both provide ample discretion to involved authorities, which casts some shadows regarding the an and quantum of the application of the bail-in tool, and also hamper investor’s predictability of the outcome. Uncertainty would, thus, cause turbulence on the debt market as some debtholders may overprice risk, causing higher funding costs which may undermine growth as a result of decreased lending capacity, whereas others may underprize risk, therefore, incentivizing moral hazard. The mispricing of debt instruments may, in the case of unexpected bail-in application, cause an overreactive price correction that may result in a liquidity freeze and consequent collapse of the interbank market. A credible bail-in regime is thus required as a pre-condition for its effective implementation. In the first paper, using a diff-in-diff analysis, we compare the subordinated bonds yields’ reaction to the implementation of the directive (EU) 2017/2399 between EU G-SIBs and smaller banks. We find an increase of subordinated bonds’ yields of EU G-SIBs relative to smaller banks between .24 and .31 basis points. We claim that the directives’ provisions enhance the bail-in regime, therefore, increasing the subordinated bondholders’ expectations of bail-in who, accordingly, reprice bonds’ yield. Moreover, we draw conclusions on the higher risk profile of subordinated bondholders following the implementation of the European bank resolution framework and suggest the effectiveness of its measures in restoring market discipline. In the second paper, we study the senior unsecured bondholders’ bail-in expectations and market monitoring activity following the events of the bail-in legislative process aimed at introducing new tools for subordination. To measure bail-in expectations, we use a difference in differences approach that compares the reaction to the bail-in events examined of bailinable bonds to the reaction of non-bailinable bonds. In a similar vein, we measure senior unsecured bondholders’ monitoring activity by using a triple differencing analysis that compares the yield-risk sensitivity reaction of senior unsecured bonds with respect to that of non-bailinable ones. A placebo test is also performed to link the results to the legal specificities of the bail-in instead of generic risk. Our results point out unaffected bail-in expectations by senior unsecured bondholders who, accordingly, do not enhance their pricing of banks’ risk. Regarding the third paper, Some controversial cases of bail-in in the emerging countries have raised the question about whether it is appropriate or not for those countries to have in place a regulation for the bail-in. To assess appropriateness, this paper investigates bail-in credibility among investors, as crucial condition for its smooth implementation, by measuring the yield-spread between bailinable and non bailinable bonds. We then compare the yield-spread of banks located in emerging countries which have in place a framework for the bail-in to the comparable yield-spread measured for banks located in emerging countries without such framework. The comparison permits to detect whether there is a significant difference between the two spreads, which would suggest that bail-in regulation has been deemed credible by market participants where enforced, or not, which in this case would signal a problem of credibility. Our results point out a significantly higher yield-spread for banks located in emerging countries which have adopted a framework for the bail-in of creditors.This thesis groups three empirical papers on the topic of the bail-in regime. The leitmotiv that links all three papers is bail-in credibility, namely the perception of market participants about the effectiveness of the bail-in regime. Bail-in credibility is crucial for the bail-in regime to take hold as puzzling rules may both provide ample discretion to involved authorities, which casts some shadows regarding the an and quantum of the application of the bail-in tool, and also hamper investor’s predictability of the outcome. Uncertainty would, thus, cause turbulence on the debt market as some debtholders may overprice risk, causing higher funding costs which may undermine growth as a result of decreased lending capacity, whereas others may underprize risk, therefore, incentivizing moral hazard. The mispricing of debt instruments may, in the case of unexpected bail-in application, cause an overreactive price correction that may result in a liquidity freeze and consequent collapse of the interbank market. A credible bail-in regime is thus required as a pre-condition for its effective implementation. In the first paper, using a diff-in-diff analysis, we compare the subordinated bonds yields’ reaction to the implementation of the directive (EU) 2017/2399 between EU G-SIBs and smaller banks. We find an increase of subordinated bonds’ yields of EU G-SIBs relative to smaller banks between .24 and .31 basis points. We claim that the directives’ provisions enhance the bail-in regime, therefore, increasing the subordinated bondholders’ expectations of bail-in who, accordingly, reprice bonds’ yield. Moreover, we draw conclusions on the higher risk profile of subordinated bondholders following the implementation of the European bank resolution framework and suggest the effectiveness of its measures in restoring market discipline. In the second paper, we study the senior unsecured bondholders’ bail-in expectations and market monitoring activity following the events of the bail-in legislative process aimed at introducing new tools for subordination. To measure bail-in expectations, we use a difference in differences approach that compares the reaction to the bail-in events examined of bailinable bonds to the reaction of non-bailinable bonds. In a similar vein, we measure senior unsecured bondholders’ monitoring activity by using a triple differencing analysis that compares the yield-risk sensitivity reaction of senior unsecured bonds with respect to that of non-bailinable ones. A placebo test is also performed to link the results to the legal specificities of the bail-in instead of generic risk. Our results point out unaffected bail-in expectations by senior unsecured bondholders who, accordingly, do not enhance their pricing of banks’ risk. Regarding the third paper, Some controversial cases of bail-in in the emerging countries have raised the question about whether it is appropriate or not for those countries to have in place a regulation for the bail-in. To assess appropriateness, this paper investigates bail-in credibility among investors, as crucial condition for its smooth implementation, by measuring the yield-spread between bailinable and non bailinable bonds. We then compare the yield-spread of banks located in emerging countries which have in place a framework for the bail-in to the comparable yield-spread measured for banks located in emerging countries without such framework. The comparison permits to detect whether there is a significant difference between the two spreads, which would suggest that bail-in regulation has been deemed credible by market participants where enforced, or not, which in this case would signal a problem of credibility. Our results point out a significantly higher yield-spread for banks located in emerging countries which have adopted a framework for the bail-in of creditors

Banks and Business Networks: Management, Governance and Financial Implications

The book investigates the phenomenon of business networks in terms of management and governance processes, and the related effects on relations with the financial system in general, and credit institutions in particular. The research is meant to identify the governance processes of business networks and the relationships that come to be developed within the network. The central idea the book intends to investigate both under a theoretical perspective and surveying a sample of firms relates to the economic and financial implications of the wide net of transfers (knowledge, services) that develop through the network. How such relations interact with firm’s investing decisions, alter firm’s riskiness and eventually can impact on firm’s value are taken into consideration. Investigating how firm’s financing decisions might change as a result of joining a network becomes an intriguing question to be addressed. The book also investigates possible adaptations to rating modes to properly account for network effects on the economics of the firm. The point of view of credit institutions in approaching the assessment of firm’s creditworthiness within networks is also considered

IL RAFFORZAMENTO DELLA CAPACITÀ PREVISIVA DEI MODELLI DI ANTICIPAZIONE DELLE CRISI DI IMPRESA: IL CASO DEL SISTEMA DI ALLERTA PROPOSTO DAL CNDCEC

As the pandemic urged further investigations on the prediction of firms’ financial distress, this study develops and tests an alternative alert system which combines the benefits of the Z-score’s multivariate discriminant model and the National Council of Chartered Accountants and Accounting Experts’ predictors. Using a sample of 43 viable and 43 non-viable Italian SMEs, we first compare the financial distress predictive accuracy of the models mentioned over the period 2015-2019. On the basis of the results, we elaborate and compare the revised versions of both approaches which align them to the current socio-economic conditions. Also, we provide an alternative measure which embeds a Z-score calculated using the ratios elaborated by the National Council of Chartered Accountants and Accounting Experts for the alert system. The analysis of the two baseline approaches showed complementary results as the Z-score overperformed the alert system when predicting the status of non-viable firms whereas the opposite emerged as regards viable firms. The revised version of both approaches pointed out an enhanced predictive accuracy with respect to baseline models. In particu- lar, the complementary role of the Z-score has been integrated into the new alert system as major contribute to its enhancement which pointed it out as the best measure employed. Our analysis enriches the post-pandemic debate on refined financial distressed prediction methods by pointing out the limits of the alert system as designed by the National Council of Chartered Accountants and Accounting Experts and suggests an alternative and better performing measure that may be used by third-party bodies to predict financial distress