Insolvency law and corporate governance: a view from Twentieth-century Italy or How to sink a firm to save a family? P. Di Martino, School of Arts, Histories, and Cultures, Manchester University M. Vasta, Department of Economics, University of Siena (Italy)

Prologue: a country with no “firms” Italy: the absence of “Coesian” firms Rapid turnover, small and young joint-stock companies inefficient technologies and business practices; absence in strategic sectors Governance: family-dominated Contrary to firms, dominating families tend to be stable

The Historical problem Are bankruptcy and insolvency laws and procedures guilty as well? bankruptcy laws and practices fundamental to firms’ selection and restart after failure Risks: excessive exposition to shocks Italian law and practices inefficient in this regard Evidence and methodology: Quantitative sources (macroeconomic data ), archival sources (failures in Milan s) plus some complementary sources for 1924 and post WWII.

Introduction Presentation structure: I. The institutional framework II. Quantitative overview III. Qualitative analysis IV. Conclusions

I. The institutional framework Available insolvency procedures Before 1942 Fallimento (liquidation and assets distribution) Concordato fallimentare (agreement with creditors to ease liquidation) Concordato preventivo (composition with creditors alternative to bankruptcy) Voluntary liquidation: allowed but unregulated After 1942 Amministrazione controllata (one year moratorium and appointment of new management)

I. The institutional framework Hypothesis: no efficient instrument to allow a real “re-start” ever available. Concordato: selection based on “moral” considerations; very strict conditions (guarantee of paying 40% unsecured debts to be paid; no assets relinquishment) limited its usage and often led to liquidation. Voluntary liquidation: no restarting plan; no creditors lock-in = dead of the company Amministrazione Controllata: Not a solution for small companies; no selection based on future viability; no restarting plan

Percentage of concordato preventivo and amministrazione controllata on total procedures ( )

Percentage of concordato preventivo and amministrazione controllata on total procedures (joint-stock companies only, )

Percentage of joint-stock companies using any kind of insolvency procedures ( )

II. Quantitative analysis - results 1) Fallimento (and concordato fallimentare) the most used procedures (Before 1942 they accounted for about %) 2) The introduction of the amministrazione controllata. changed little (only in the 1970s amministrazione controllata and concordato together covered about 10% of cases) 3) A.c. was mainly used by S.p.a. (joint-stock limited- liability companies) (up to 20% of cases) 4) However only about 1% the S.p.a population ever used any insolvency procedure.

III. Qualitative analysis Main Sample: 135 companies failed in Milan between 1923 and 1932 about 2/3 of all joint-stock companies failed in Milan Milan = about 1/3 of Italian companies)

Insolvency in Milan by outcomes Bankruptcy Conc Prev No inf Tot. Fraud. Bankr. and/or Bfraud. Bankr. and/or Conc. Fall. Conc. Fall. Insuf. Att. Tot

III. Qualitative analysis Most of companies failed because of structural problems and/or frauds; however other problems appear: Concordato preventivo was difficult to get No attention for innovative entrepreneurs and/ or viable companies Companies used voluntary liquidation, but no re- launch plan was linked to it (or creditors lock-in mechanism); voluntary liquidation often resulted in bankruptcy, even because of the action of one single creditor

III. 1 Concordato preventivo 1) Ex-ante guarantee 40% (12 out of 17 concordato fallimentare paid more than 25%, the English treshold). Court’s screening (complicated procedure and imperfect information) Società Anonima Circes (1924) “encountered many difficulties, essentially of procedural nature.” Cartiera Albano Franchini: better information available during liquidation than before. Creditors’ screening (coordination problem) Fonderia di Desio, friendly agreement (50% of debts), turned down by self-interested creditors “Everyone looking after their own interest”

III.1 Concordato preventivo Courts’ decisions: no relevance of innovativeness or viability Number of concordati preventivi: 3 Innovative: 31 traditional: 111 Unknown 9. Viable: (bankruptcy of their own debtors, lack of capital, mismanagement, exogenous short-term shocks) 27, Unviable 96, Unknown 30

III.1 Concordato preventivo Giglio, ‘Schumpeterian’ company: early 1920s it first produced a prototype of side lights for cars; bankruptcy De Capitani & F.lli Progresso Agricolo Ferraniense (concordato allowed) formal guarantees provided and the modality of payment, no other criteria considered

III. 2 Voluntary liquidation Inefficient formal institutions = rush into voluntary liquidation 1924: hundred and sixteen joint-stock companies disappeared, but only 12 official procedures were opened hard to get creditors to agree on a re-launch program Magazzini 33 and Industrie Meccaniche Servadei Benetti agreement with creditors tried only after that an earlier attempt to liquidate failed.

III. 2 Voluntary liquidation Moreover, liquidation often led to bankruptcy of solvent companies; 37 companies failed during liquidation, including: Bacapa assets exceeding the nominal value of liabilities Società Anonima Cooperativa “La Casa” able to pay all debts but technical mistakes during the liquidation Industria Dattilografica and the Federazione Casearia Italiana condemned to bankruptcy by one single creditor (thirty thousands lira against capital of two millions)

III.3 Amministrazione Controllata No direct evidence, counterfactual; Two questions: was it useful? Was it easy to access? Was AC useful? Management replacement main of sole cause of failure in 7 cases, among the causes in 18. However, need to re-capitalise main problems among viable companies: AC was no solution

III.3 Amministrazione Controllata Was AC available? Ac based on replacement of management Failed companies were small: no separation between management and property About 1/3 of Italian companies larger than 1 Million lira capital, about only 10% in the sample of bankrupted companies, 13% in the one of disappeared companies.

III.3 Capital of companies bankrupted in Milan (thousands of Lira) Size Up to Tot. under or above Unknown Tot. sample Number of companie s

Conclusions (I) 1) official procedures: failure to provide efficient restarting mechanisms. Concordato preventivo was hard to get and not selective pro viable/innovative firms AC: only applies to few big companies with management problems 2) over-use of voluntary liquidation often leading to firms’ death 3) our view; Italian joint-stock companies overexposed to “natural” instability died more often and younger.

Conclusions (II) Why an inefficient legislation? Fuzzy law = legitimisation of business consultants, often operating as receivers during insolvencies Business consults helping asset-stripping by “families”, (De Cecco). Especially during liquidation and restarting? Companies die, families survive?

Conclusions (III) La Porta et al. (2000): corporate governance and exploitation of minority stockholders; Guinnaine et al.: legal regimes allow different systems of governance. Italy: all forms of governance were allowed (and used), but exploitation was based on informal bending of inefficient formal institutions.