P. Di Martino , School of Arts, Histories, and Cultures, Manchester University

1. Insolvency law and corporate governance: a view from Twentieth-century Italyor 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)

2. 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

3. 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 1920-1970), archival sources (failures in Milan 1920-1930s) plus some complementary sources for 1924 and post WWII.

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

5. 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)

6. 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

7. Percentage of concordato preventivo and amministrazione controllata on total procedures (1904-1980)

8. Percentage of concordato preventivo and amministrazione controllata on total procedures (joint-stock companies only, 1947-1980)

9. Percentage of joint-stock companies using any kind of insolvency procedures (1947-1980)

10. II. Quantitative analysis - results 1) Fallimento (and concordato fallimentare) the most used procedures (Before 1942 they accounted for about 96-98%) 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.

11. 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)

12. Insolvency in Milan by outcomes

13. III. Qualitative analysis Most of companies failed because of structural problems and/or frauds; however other problems appear: • Concordato preventivowas 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

14. 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”

15. 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

16. 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

17. 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 33and Industrie Meccaniche Servadei Benettiagreement with creditors tried only after that an earlier attempt to liquidate failed.

18. 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)

19. 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

20. 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.

21. Size Tot. sample Up to 10 11-50 Tot. under 50 51-100 101-300 301-500 501-999 1000 or above Unknown Number of companies 153 33 31 64 13 18 16 5 14 23 III.3 Capital of companies bankrupted in Milan (thousands of Lira)

22. 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.

23. 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?

24. 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.