Legal environment and corporate finance: evidence from the Italian manufacturing industry

Considering the Italian manufacturing industry between 2014 and 2016 (more than 250,000 observations), this technical note analyzes the relation between the courts’ ability to enforce credit rights and the opportunity to finance business activities with trade credits instead of financial debts, delaying payments and decreasing the financial costs. According to our results, and considering mortgage foreclosure, if the time necessary to settle an insolvency case increases by 1000 days, we can expect an increase in operating debt between 3 and 11%, and a decrease of financial expenses between 3000 and 7000 Euro.

inefficiency in enforcing credit rights to prompt debtors to substitute financial debts with trade credits.
This technical note aims at shedding new empirical evidence to confirm the expected impact of judicial inefficiency on corporate finance, testing empirically whether judicial delay can affect the substitution of financial debt with trade credits on a specific case study: the Italian manufacturing industry. Current data on the Italian judicial system and the dynamics of the Italian manufacturing industry can help us establish whether this corporate strategy actually exists, testing the expected positive relation between the time needed to settle a case of insolvency (i.e., mortgage foreclosure and bankruptcy) and the access to operating debts. At the same time, as robust test, we have the opportunity to analyze the expected negative relation between the same proxy of judicial efficiency (i.e., time necessary to settle a case of insolvency) and financial expenses. If the proposed hypothesis is confirmed, the economic implications of this negative externality could be far-reaching for the whole economy, decreasing both the competitiveness and the financial stability of the national system, as well as triggering a cascade effect on the market. This may be even truer in the Italian market, with its characteristic structure based mostly on smallmedium enterprises (SMEs).
The remainder of this manuscript is organized as follows. The second section illustrates the case study and the methodology adopted to validate the above hypothesis and current evidence, as well as the results of the empirical analysis. The last section describes the conclusions of our research.

Case study: the Italian judicial system and insolvency procedures
The Italian Ministry of Justice is in charge of administering civil and criminal justice, which is divided into two main tiers and one lowest level. At the lowest level are the so-called Justices of the Peace (i.e., Giudici di Pace), with specific civil and criminal competences. At a higher level, the first tier includes first instance courts (i.e., Tribunali Ordinari), while the second tier comprises second instance courts (i.e., Corte di Appello), which are responsible for appeals against first instance judgments. In the period considered (i.e., between 2014 and 2016), there were 140 first instance courts and 26 s instance courts. The first and the second instance courts are grouped according to their judicial geography to form 26 judicial districts (i.e., Distretto di Corte di Appello). Finally, there is also a court of last resort (i.e. Corte Suprema di Cassazione), with seat in Rome and acting as the highest appellate court in all civil and criminal cases.
According to the Italian law, there are two formal procedures to settle an insolvency case (Rodano et al. 2016;Falavigna and Ippoliti 2020). The creditors can either initiate a process of mortgage foreclosure (i.e., esecuzione forzata), which can target the debt-ors´ movables or real estate, or apply to certify the debtor's insolvency (i.e., istanza di fallimento); after this preliminary step, the court will enforce their credit rights through a bankruptcy procedure (i.e., fallimento). Moreover, the debtor can apply for an arrangement with creditors through the mediation of the court (i.e., concordato Falavigna and Ippoliti Economic Structures (2021) 10:21 preventivo). Obviously, in the latter case, the creditors cannot expect to fully recover the amounts due, but the defaulting debtor may be expected to cooperate. Under the Italian law, all creditors can engage in a mortgage foreclosure procedure, that is to say, all secured and unsecured credits can be enforced by courts through mortgage foreclosure of debtors' goods (i.e., movable and/or real estate). The main difference between secured and unsecured credits revolves around the goods involved in the insolvency procedure. In the former situation, there is a specific good that represents the collateral in case of insolvency with respect to that specific secured credit, which cannot be involved by other creditors in other insolvency procedures (i.e., there is an exclusive right to use that good as collateral for a single secured credit). In the latter situation, there are no specific guarantees for unsecured credits, i.e., all the remaining debtors' goods that do not represent a collateral for a secured credit can be involved in the insolvency procedure to collect the due amount of money. In both cases, there is a specific judicial procedure aimed at certifying the insolvency status of the debtor (e.g., an unpaid invoice), and an order of payment is then issued by the same court (i.e., Decreto Ingiuntivo di Pagamento). After 40 days, if there are no oppositions by the debtor and/or the due payment is not made, the aforementioned order is enforceable and the foreclosure procedure can start. At this point, the payment of secured credits is facilitated by the current procedure, since a foreclosure order is not necessary (i.e., Atto di Pignoramento), simplifying the bailiff´s work and reducing the time needed to collect the due amount of money, since the object of the foreclosure has already been identified (i.e., the collateral). The alternative approach to foreclosure is bankruptcy, which is largely a debtor-protective process and prevents creditors from seizing and selling the debtor's assets piecemeal, giving time to liquidate the debtor in an orderly fashion or, more commonly, sell the business as a going concern or reorganize its capital structure. Note that only the biggest companies can be involved in bankruptcy procedures. Indeed, according to current regulations, creditors can initiate bankruptcy procedures if, and only if, the debtors have in the three previous year at least one of the following index: assets higher than 300,000.00 Euro, gross revenues higher than 200,000.00 Euro or total debts higher than 500,000.00 Euro. On the other hand, all insolvent debtors can be involved in mortgage foreclosure procedures. Lastly, the current procedures prescribe that judicial competence for insolvency cases depends on the location of either the registered office or the main production facility of the insolvent business. Therefore, the creditor will apply for a declaration of insolvency or mortgage foreclosure to the competent court of first instance, taking the location of the debtor's registered office or production facility into account, and then, if necessary, present an appeal against this judgment to the competent court of second instance. Table 4 in the Appendix presents an overview of the average time (expressed in days) necessary to settle insolvency procedures between 2014 and 2016, according to judicial districts and geographical macro-areas.

Empirical strategy
The case study under investigation is the Italian manufacturing industry, which is extremely interesting. On the one hand, Italy's judicial system is one of the worst in the European Union (CEPEJ 2016); while, on the other hand, the manufacturing industry is characterized by one of the highest level of trade credits according to the European Committee of Central Balance Sheet Data Offices (ECCBSO). Considering judicial delay (see https:// webst at. giust izia. it), the average time needed to settle a bankruptcy case was equal to 3000 days in 2016, which is absolutely unreasonable. 1 This unsustainable opportunity cost may force creditors to wait for payments instead of submitting an insolvency application.
In particular, authors analyze the Italian manufacturing industry (more than 250,000 observations) and a panel of 3 years (from 2014 to 2016), with a strongly balanced sample. We test the proposed hypothesis by merging two main sources of information: data on judicial inefficiency at the first instance level (insolvency cases), extracted from the database of the Italian Ministry of Justice, and financial information on Italian manufacturing companies, extracted from AIDA (Bureau van Dijk´s database). Lastly, in order to collect more robust results, we look at the Median Absolute Deviation (MAD) to detect and then drop the outliers (Leys et al. 2013).
Considering the ith company at time t, we study several OLS multivariate regression models (panel data with random effects and robust standard errors) 2 with the following forms: where DEBT is the percentage of operating debts in the short term (i.e., less than 1 year) over the total amount of debts in the short term (i.e., operating and financial debts), 3 while FIN is the total amount of financial expenses in the short term (i.e., less than 1 year). Both variables represent the dependent variable of the proposed models.
The former model represents our main analysis, while the latter is a robust check to support our results. On the one hand, the operating debt ratio denotes how managerial strategies change according to the judicial environment, showing whether companies fund their activities with trade credits; while, on the other hand, financial expenses can confirm the previous model, highlighting whether the financial costs are coherently affected by the same judicial environment. In other words, the higher (1) 1 According to the same statistics, the average time to settle a mortgage foreclosure case was equal to 250 days (movable) and to 1,600 days (real estate). 2 Authors adopt random effects since the key explanatory variables (i.e., mortgage foreclosure and bankruptcy) have a very slow year-to-year variation, and a fixed effects approach might bias the collected estimations. 3 Note that in this estimation we do not consider debts toward subsidiary, associate, and parent companies. the judicial inefficiency, the higher the operating debt ratio (i.e., the higher the adoption of trade credits to support companies´ activities) and, consequently, the lower the financial expenses (i.e., the lower the access to external financial resources by companies).
Afterwards, JUD is the time needed to settle an insolvency case (log transformation) in the jth district, in which the company is located, and represents our key explanatory variable. Both models look at judicial inefficiency at time t-1, i.e., on the lagged variable. In detail, three case matters are considered in order to observe the impact of judicial inefficiency: mortgage foreclosure (i.e., both movable and real estate) and bankruptcy.
We also introduce some internal and external control variables, recalling the models proposed by Falavigna and Ippoliti (2020). Among the former controls, we include the following characteristics of companies: • LIQ, which is a continuous variable equal to financial and operating activities divided by debts payable before the end of the year, and it represents firms' liquidity at short run; • AGE, which is a continuous variable indicating the seniority of our observations (log transformation); • SIZE, which is a matrix of dummy variables equal to 1 according to the European Union classification (3 total assets-based categories: large, medium, and small company); • FORM, which is a matrix of dummy variables equal to 1 according to the company's legal classification (3 classes: public limited company, private limited company, other legal form); • InnSME, which is a dummy variable equal to 1 if the observation is classified as an innovative small and medium enterprise (SME), 0 otherwise; • InnStUp, which is a dummy variable equal to 1 if the observation is classified as an innovative start-up, 0 otherwise; • INDU, which is a matrix of dummy variables equal to 1 if the productivity sector (2 digit) belongs to the selected NACE sector, 0 otherwise; while, among the latter controls, we analyze the following environmental characteristics: • AREA, which is a matrix of dummy variables equal to 1 if the observation is located in that NUTS 1 geographical macro area (5 categories: North West, North East, Center, South, and Islands). Table 1 shows some descriptive statistics of dependent and explanatory variables. Lastly, Tables 5 and 6 in the Appendix present a more detailed overview of debt ratio and financial expenses between 2014 and 2016, according to judicial districts and geographical macro-areas.

Results
Tables 2 and 3 present the results of the multivariate regression models, using a panel sample with random effects and robust standard errors. In detail, Table 2 illustrates the results of model A (i.e., with debt ratio as dependent variable), while Table 3 shows the results of model B (i.e., with financial expenses as dependent variable).
Note that the number of observations in the third column varies depending on the companies that may be subjected to a bankruptcy procedure (Italian Legislative Decree no. 169/2007). According to the Wald Chi-square statistics, the models are statistically significant (i.e., at least one of the regression coefficients is not equal to zero), while the R-squared is extremely interesting, ranging between 0.15 and 0.16 in model A, and between 0.31 and 0.32 in model B.
Lastly, in order to verify whether the collected estimations are biased by this censoring phase, we propose as robust analysis the same models, but without dropping the outliers, i.e., considering the whole sample of observations. Tables 7 and 8 present the collected results on the robust test.

Discussion
Based on these results, we cannot reject the hypothesis that judicial inefficiency can affect corporate finance. The greater the judicial inefficiency in insolvency procedures, the higher the share of operating debts, as well as the lower the financial expenses. In other words, institutional inefficiency has an impact on corporate finance, prompting managers to adopt opportunistic strategies in the short run. These results are rather robust, since we can observe the same positive relations across all case matters, which are statistically significant (p-value < 0.01). Focusing on the judicial procedures, ceteris paribus, we expect to detect the highest impact in relation to mortgage foreclosure (real estate). Indeed, taking model A into consideration, if the time necessary to settle a case using this procedure increases by 1000 days, we expect operating debts to rise by 10.85%. Focusing on the other two case matters, assuming the same delay of 1000 days, we expect an increase equal to 2.70% (movable goods) and to 3.20% (bankruptcy). Taking model B into account, if the time necessary to settle a case increases by the same delay of 1000 days, we expect financial expenses to decrease by 7464 Euro (real estate), 3236 Euro (movable goods) and 2153 Euro (bankruptcy). Hence, we cannot reject previous evidence on the relation between the time needed by courts to enforce debtors' obligations and the time needed by enterprises to repay their debts. Indeed, Falavigna and Ippoliti (2020) suggest that if the time needed to settle bankruptcy cases increases by 25%, we can expect the payment delay to increase by 1%; while, focusing on foreclosure cases, we can expect the payment index to increase by 2%. Figure 1 highlights the same positive relation, seen from a different perspective. In this case, we plot the judicial districts, weighting the observations by the number of companies located in that district, and we look at the relation between the days needed to settle a bankruptcy case and our dependent variables, i.e., the debt ratio (on the left) and the financial expenses (on the right). According to the estimated coefficients (p-value < 0.01), on average, if judicial inefficiency increases by 1000 days, Table 3 Model B: analysis of the Italian manufacturing industry with judicial insolvency procedures at time t-1 (Italy, 2015(Italy, -2016 Robust standard errors in parentheses *** p < 0.01, **p < 0.05, *p < 0.  we expect our companies to react by increasing their operating debts in the short run by 2.20%, and decreasing the financial expenses of 1000 Euro. Note that an increasing of 1000 days is not so unrealistic since, according to statistics of the Italian Ministry of Justice, the average time in 2016 to settle bankruptcy cases is 3,000 days, as well as highlighted in the first section.

Conclusions
The current literature highlights the expected positive impact of judicial efficiency on market dynamics, thus encouraging economic growth (Hayo and Voigt 2013). Indeed, a judicial system able to efficiently enforce the law can support entrepreneurship (Lichand and Soares 2014;Fu et al. 2018), firm growth (Giacomelli and Menon 2017), as well as financial dynamics (Haselmann and Wachtel 2010;Moro et al. 2018;Shah et al. 2017). What about corporate finance? Taking insolvency procedures into account, is it admissible to hypothesize that inefficient courts can affect the financial strategies adopted by companies? This technical note aims to confirm evidence on the relation between institutional performance and firm dynamics, testing the hypothesis that efficiency in settling mortgage foreclosure and bankruptcy cases can affect firms' access to the capital market. Coherently with Falavigna and Ippoliti (2020), our evidence suggest that institutional efficiency can affect firms strategies, showing how inordinately long waiting times to enforce credit rights may increase their access to the trade credits.
Policy-makers ought to be aware of these dynamics, so as to evaluate opportunities to improve the current insolvency procedures (Falavigna and Ippoliti 2021). This necessity becomes even more significant if we consider the Italian case, since its market is shaped around micro-and small enterprises, which may not survive such opportunistic finance strategies.
Obviously, these are results that should be investigated in greater depth to collect more robust evidence on this key issue. For example, data about the financial market can add information on financial constraints and related difficulties in collecting external resources, which are likely to force companies to adopt the suggested strategies. Nevertheless, this work can contribute to shedding new light on such an important matter, steering interest in this direction.   Number of companies 87,557 87,557 77,853 of the work, even ones in which the author was not personally involved, are appropriately investigated, resolved, and documented in the literature.

Funding
None.

Availability of data and materials
Judicial dataset are available on request.