New research from Bocconi University in Milan reports that, contrary to popular wisdom, connections to organized crime harm a company’s financial performance and increase by 25.5% its likelihood of bankruptcy.
Using new datasets from AISI, Italy’s Internal Intelligence and Security Agency, and Bocconi professors Antonio Mara, Donato Maciandaro, and Nicola Beccchiari in a paper co-authored with Pietro Bianchi (Florida International University) published online at accounting audit المراجعة, identified 1,840 criminally linked companies based in the Italian region of Lombardy.
Lombardy, the northern Italian region surrounding Milan, is not one of the regions where organized crime has traditionally emerged. However, it accounts for 25% of the Italian GDP and has recently become a major target of organized crime economic activities.
The authors identify the directors and shareholders subject to investigations of crimes attributed to criminal organizations (eg, mafia-type associations, fraudulent invoices, usury, and smuggling) from 2006 to 2013. A company whose director is under investigation is considered connected from the time the director was appointed.
With this data, they provide the first large-scale evidence of the effects of mafia connections on company performance and show that, contrary to popular belief, such connections drain company resources. As the authors noted in an interview, “If the unintended effect of literature on Mafia entrepreneurship is to create some kind of ambiguity about the concept of criminal entrepreneurship, then our findings are certainly against that ambiguity.”
Notably, they found that while connected firms may report higher sales and have lower labor costs, they show a 15.6% lower return on assets than unconnected firms. The authors attribute this sudden drop in profitability to money laundering, in which funds are moved to and from cash-intensive businesses and between corporate headquarters in various jurisdictions to make tracing the criminal origins of funds more difficult. This can be done through false invoices that inflate costs, and thus reduce profitability.
They also found that related companies had 8.4% higher debt levels. Companies suspiciously used more bank loans at much lower interest rates despite being less profitable, indicating the existence of fictitious loans. And with their cash holdings down 5.9%, these companies face liquidity constraints due to their resource-draining criminal ties. Connectivity also allows companies to sell their inventory faster through coercion and bribery and monetize their sales. In quantitative terms, this means that the operating cycle is 4.02% shorter (i.e. companies convert current assets into cash and pay current liabilities faster). Remarkably, the correlation increases the probability of a company defaulting – filing for bankruptcy, insolvency or liquidation – by 25.5%.
The authors validate their findings using a 2011 amendment to the Italian Anti-Money Laundering Regulation, which lowered the cap on cash-based transactions and improved scrutiny. Restrictions on cash transactions and the ability to use fake invoices made connected companies more similar to their unrelated counterparts in terms of sales revenue and costs of goods sold, thus supporting their findings on the negative effects of mafia contacts.
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Pietro Andrea Bianchi et al., Organized crime and corporate financial data: evidence from criminal investigations in Italy, accounting audit المراجعة (2021). DOI: 10.2308 / TAR-2019-0079
Presented by Bocconi University
the quote: Mafia-Linked Companies: Less Profitable, Likely to Collapse (2021, July 21) Retrieved on July 25, 2021 from https://phys.org/news/2021-07-firms-mafia-profitability.html
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