The impact of institutional performance on payment dynamics: evidence from the Italian manufacturing industry
Abstract
This work aims to shed new light on the relation between institutional performance and firm dynamics. Considering the Italian manufacturing industry and a panel of 3 years, the authors investigate the relation between the time needed by courts to enforce debtors’ obligations and the time needed by enterprises to repay their debts. In particular, we test the hypothesis that efficiency in settling mortgage foreclosure and bankruptcy cases can affect the creditors’ decision making on judicial disputes. According to our thesis, inordinately long waiting times to enforce credit rights may increase the contractual strength of debtors, further delaying payments. As shown by our results, there is a statistically significant positive relation between the enforcement of debtors’ obligations and the adopted payment index, confirming the key role of the judiciary in the dynamics of firms. Indeed, if the time needed to settle bankruptcy cases decreases by 25%, we can expect the payment index to decrease by 1%; while, focusing on foreclosure cases, we can expect the payment index to decrease by 2%. The policy implications of these results are rather compelling. Policy makers could reform foreclosure and bankruptcy procedures to support national economic growth, without additional burden on the public budget.
Keyword : manufacture industry, payment dynamics, institutional performance, strategic management, judicial efficiency, insolvency procedures
How to Cite
Falavigna, G. ., & Ippoliti, R. . (2020). The impact of institutional performance on payment dynamics: evidence from the Italian manufacturing industry. Journal of Business Economics and Management, 21(5), 1285-1306. https://doi.org/10.3846/jbem.2020.13195
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Berkowitz, D., Moenius, J., & Pistor, K. (2006). Trade, law, and product complexity. Review of Economics and Statistics, 88(2), 363–373. https://doi.org/10.1162/rest.88.2.363
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Giacomelli, S., & Menon, C. (2017). Does weak contract enforcement affect firm size? Evidence from the neighbour’s court. Journal of Economic Geography, 17(6), 1251–1282.
Gill, A., Amiraslany, A., Obradovich, J., & Mathur, N. (2019). Efficient working capital management, bond quality rating, and debt refinancing risk. Managerial Finance, 45(7), 869–885. https://doi.org/10.1108/MF-06-2018-0269
Grossman, S., & Hart, O. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94(4), 691–719. https://doi.org/10.1086/261404
Hann, D., Nash, D., & Heery, E. (2019). Workplace conflict resolution in Wales: The unexpected prevalence of alternative dispute resolution. Economic and Industrial Democracy, 40(3), 776–802. https://doi.org/10.1177/0143831X16663013
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Hart, O., & Moore, J. (1990). Property rights and nature of the firm. Journal of Political Economy, 98(6), 1119–1158. https://doi.org/10.1086/261729
Hayo, B., & Voigt, S. (2013). The relevance of judicial procedure for economic growth. CESifo Economic Studies, 60(3), 490–524. https://doi.org/10.1093/cesifo/ifs044
Hillier, D., Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2013). Corporate finance (2 ed.). McGraw Hill.
Huber, P. J. (1981). Robust statistics. John Wiley. https://doi.org/10.1002/0471725250
Ippoliti, R., & Tria, G. (2020). Efficiency of judicial systems: Model definition and output estimation. Journal of Applied Economics, 23(1), 385–408. https://doi.org/10.1080/15140326.2020.1776977
Jappelli, T., Pagano, M., & Bianco, M. (2005). Courts and banks: Effects of judicial enforcement on credit markets. Journal of Money, Credit and Banking, 37(2), 223–244. https://doi.org/10.1353/mcb.2005.0021
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Jose, M. L., Lancaster, C., & Stevens, J. L. (1996). Corporate returns and cash conversion cycles. Journal of Economics and Finance, 20(1), 33. https://doi.org/10.1007/BF02920497
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Lichand, G., & Soares, R. R. (2014). Access to justice and entrepreneurship: Evidence from Brazil’s special civil tribunals. The Journal of Law and Economics, 57(2), 459–499. https://doi.org/10.1086/675087
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Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261–297.
Nunn, N. (2007). Relationship-specificity, incomplete contracts, and the pattern of trade. Quarterly Journal of Economics, 122(2), 569–600. https://doi.org/10.1162/qjec.122.2.569
Ponticelli, J., & Alencar, L. S. (2016). Court enforcement, bank loans, and firm investment: evidence from a bankruptcy reform in Brazil. The Quarterly Journal of Economics, 131(3), 1365–1413. https://doi.org/10.1093/qje/qjw015
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Psillaki, M., Tsolas, I. E., & Margaritis, D. (2010). Evaluation of credit risk based on firm performance. European Journal of Operational Research, 201(3), 873–881. https://doi.org/10.1016/j.ejor.2009.03.032
Qian, J., & Strahan, P. E. (2007). How laws and institutions shape financial contracts: The case of bank loans. Journal of Finance, 62(6), 2803–2834. https://doi.org/10.1111/j.1540-6261.2007.01293.x
Ranjan, P., & Lee, J. Y. (2007). Contract enforcement and international trade. Economics and Politics, 19(2), 191–218. https://doi.org/10.1111/j.1468-0343.2007.00308.x
Rodano, G., Serrano-Velarde, N., & Tarantino, E. (2016). Bankruptcy law and bank financing. Journal of Financial Economics, 120(2), 363–382. https://doi.org/10.1016/j.jfineco.2016.01.016
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Antràs, P. (2005). Incomplete contracts and the product cycle. American Economic Review, 95(4), 1054– 1073. https://doi.org/10.1257/0002828054825600
Armour, J., & Cumming, D. (2008). Bankruptcy law and entrepreneurship. American Law and Economics Review, 10(2), 303–350. https://doi.org/10.1093/aler/ahn008
Bae, K. H., & Goyal, V. K. (2009). Creditor rights, enforcement, and bank loans. The Journal of Finance, 64(2), 823–860. https://doi.org/10.1111/j.1540-6261.2009.01450.x
Bay, S., Kumaraswamy, K., Anderle, M. G., Kumar, R., & Steier, D. M. (2006, December). Large scale detection of irregularities in accounting data. In Sixth International Conference on Data Mining (ICDM’06) (pp. 75–86). Hong Kong, China. IEEE. https://doi.org/10.1109/ICDM.2006.93
Becchetti, L., & Sierra, J. (2003). Bankruptcy risk and productive efficiency in manufacturing firms. Journal of Banking & Finance, 27(11), 2099–2120. https://doi.org/10.1016/S0378-4266(02)00319-9
Beck, T., & Demirguc-Kunt, A. (2005). Law and firms’ access to finance. American Law and Economics Review, 7(1), 211–252. https://doi.org/10.1093/aler/ahi006
Berkowitz, D., Moenius, J., & Pistor, K. (2006). Trade, law, and product complexity. Review of Economics and Statistics, 88(2), 363–373. https://doi.org/10.1162/rest.88.2.363
CEPEJ. (2016). Evaluation of European Judicial Systems (CEPEJ Report). European Commission for the Efficiency of Justice (CEPEJ).
Chakraborty, P. (2016). Judicial quality and regional firm performance: The case of Indian states. Journal of Comparative Economics, 44(4), 902–918. https://doi.org/10.1016/j.jce.2016.07.001
Chemin, M. (2009). The impact of the judiciary on entrepreneurship: Evaluation of Pakistan’s “Access to Justice Programme”. Journal of Public Economics, 93(1–2), 114–125. https://doi.org/10.1016/j.jpubeco.2008.05.005
Chemin, M. (2010). Does court speed shape economic activity? Evidence from a court reform in India. The Journal of Law, Economics, & Organization, 28(3), 460–485. https://doi.org/10.1093/jleo/ewq014
Christensen, R. K., & Szmer, J. (2012). Examining the efficiency of the U.S. Courts of appeals: Pathologies and prescriptions. International Review of Law and Economics, 32(1), 30–37. https://doi.org/10.1016/j.irle.2011.12.004
Di Vita, G. (2010). Production of laws and delays in court decisions. International Review of Law and Economics, 30(3), 276–281. https://doi.org/10.1016/j.irle.2010.03.006
Djankov, S., Hart, O., McLiesh, C., & Shleifer, A. (2008). Debt enforcement around the world. Journal of Political Economy, 116(6), 1105–1149. https://doi.org/10.1086/595015
Djankov, S., McLiesh, C., & Shleifer, A. (2007). Private credit in 129 countries. Journal of Financial Economics, 84(2), 299–329. https://doi.org/10.1016/j.jfineco.2006.03.004
Dougherty, S. M. (2014). Legal reform, contract enforcement and firm size in Mexico. Review of International Economics, 22(4), 825–844. https://doi.org/10.1111/roie.12136
Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of working capital management on firm profitability in different business cycles: Evidence from Finland. Research in International Business and Finance, 32, 36–49. https://doi.org/10.1016/j.ribaf.2014.03.005
Fabbri, D. (2010). Law enforcement and firm financing: Theory and evidence. Journal of the European Economic Association, 8(4), 776–816. https://doi.org/10.1111/j.1542-4774.2010.tb00540.x
Falavigna, G., & Ippoliti, R. (2018). Industrial spatial dynamics, financial health and bankruptcy: Evidence from Italian manufacturing industry. Economia e Politica Industriale, 45(4), 533–554. https://doi.org/10.1007/s40812-018-0102-4
Falavigna, G., Ippoliti, R., & Manello, A. (2019). Judicial efficiency and immigrant entrepreneurs. Journal of Small Business Management, 57(2), 421–449. https://doi.org/10.1111/jsbm.12376
Falavigna, G., Ippoliti, R., & Ramello, G. B. (2018). DEA-based Malmquist productivity indexes for understanding courts reform. Socio-Economic Planning Sciences, 62, 31–43. https://doi.org/10.1016/j.seps.2017.07.001
Filzmoser, P., Maronna, R., & Werner, M. (2008). Outlier identification in high dimensions. Computational Statistics & Data Analysis, 52(3), 1694–1711. https://doi.org/10.1016/j.csda.2007.05.018
Fraquelli, G., Carelli, M. T., Capriello, A., & Ragazzi, E. (2002). Il bilancio per i manager. Guida per interpretare i fatti aziendali. CEA.
García-Posada, M., & Mora-Sanguinetti, J. S. (2013). Are there alternatives to bankruptcy? A study of small business distress in Spain (Documentos de Trabajo N.° 1315). del Banco de España.
Giacomelli, S., & Menon, C. (2017). Does weak contract enforcement affect firm size? Evidence from the neighbour’s court. Journal of Economic Geography, 17(6), 1251–1282.
Gill, A., Amiraslany, A., Obradovich, J., & Mathur, N. (2019). Efficient working capital management, bond quality rating, and debt refinancing risk. Managerial Finance, 45(7), 869–885. https://doi.org/10.1108/MF-06-2018-0269
Grossman, S., & Hart, O. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94(4), 691–719. https://doi.org/10.1086/261404
Hann, D., Nash, D., & Heery, E. (2019). Workplace conflict resolution in Wales: The unexpected prevalence of alternative dispute resolution. Economic and Industrial Democracy, 40(3), 776–802. https://doi.org/10.1177/0143831X16663013
Hart, O. (1995). Firms, contracts, and financial structure. Oxford University Press. https://doi.org/10.1093/0198288816.001.0001
Hart, O., & Moore, J. (1990). Property rights and nature of the firm. Journal of Political Economy, 98(6), 1119–1158. https://doi.org/10.1086/261729
Hayo, B., & Voigt, S. (2013). The relevance of judicial procedure for economic growth. CESifo Economic Studies, 60(3), 490–524. https://doi.org/10.1093/cesifo/ifs044
Hillier, D., Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2013). Corporate finance (2 ed.). McGraw Hill.
Huber, P. J. (1981). Robust statistics. John Wiley. https://doi.org/10.1002/0471725250
Ippoliti, R., & Tria, G. (2020). Efficiency of judicial systems: Model definition and output estimation. Journal of Applied Economics, 23(1), 385–408. https://doi.org/10.1080/15140326.2020.1776977
Jappelli, T., Pagano, M., & Bianco, M. (2005). Courts and banks: Effects of judicial enforcement on credit markets. Journal of Money, Credit and Banking, 37(2), 223–244. https://doi.org/10.1353/mcb.2005.0021
Johnson, S., McMillan, J., & Woodruff, C. (2002). Courts and relational contracts. Journal of Law, Economics, and Organization, 18(1), 221–277. https://doi.org/10.1093/jleo/18.1.221
Jose, M. L., Lancaster, C., & Stevens, J. L. (1996). Corporate returns and cash conversion cycles. Journal of Economics and Finance, 20(1), 33. https://doi.org/10.1007/BF02920497
Laeven, L., & Majnoni, G. (2005). Does judicial efficiency lower the cost of credit? Journal of Banking and Finance, 7(29), 1791–1812. https://doi.org/10.1016/j.jbankfin.2004.06.036
Levchenko, A. (2007). Institutional quality and international trade. Review of Economic Studies, 74(3), 791–819. https://doi.org/10.1111/j.1467-937X.2007.00435.x
Leys, C., Ley, C., Klein, O., Bernard, P., & Licata, L. (2013). Detecting outliers: Do not use standard deviation around the mean, use absolute deviation around the median. Journal of Experimental Social Psychology, 49(4), 764–766. https://doi.org/10.1016/j.jesp.2013.03.013
Lichand, G., & Soares, R. R. (2014). Access to justice and entrepreneurship: Evidence from Brazil’s special civil tribunals. The Journal of Law and Economics, 57(2), 459–499. https://doi.org/10.1086/675087
Mattsson, P., & Tidanå, C. (2019). Potential efficiency effects of merging the Swedish district courts. Socio–Economic Planning Sciences, 67, 58–68. https://doi.org/10.1016/j.seps.2018.09.002
Miller, J. (1991). Reaction time analysis with outlier exclusion: Bias varies with sample size. The Quarterly Journal of Experimental Psychology, 43(4), 907–912. https://doi.org/10.1080/14640749108400962
Mitsopoulos, M., & Pelagidi,s T. (2007). Does staffing affect the time to dispose cases in Greek Courts? International Review of Law and Economics, 27(2), 219–244. https://doi.org/10.1016/j.irle.2007.06.001
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261–297.
Nunn, N. (2007). Relationship-specificity, incomplete contracts, and the pattern of trade. Quarterly Journal of Economics, 122(2), 569–600. https://doi.org/10.1162/qjec.122.2.569
Ponticelli, J., & Alencar, L. S. (2016). Court enforcement, bank loans, and firm investment: evidence from a bankruptcy reform in Brazil. The Quarterly Journal of Economics, 131(3), 1365–1413. https://doi.org/10.1093/qje/qjw015
Prasad, P., Narayanasamy, S., Paul, S., Chattopadhyay, S., & Saravanan, P. (2019). Review of literature on working capital management and future research agenda. Journal of Economic Surveys, 33(3), 827–861. https://doi.org/10.1111/joes.12299
Psillaki, M., Tsolas, I. E., & Margaritis, D. (2010). Evaluation of credit risk based on firm performance. European Journal of Operational Research, 201(3), 873–881. https://doi.org/10.1016/j.ejor.2009.03.032
Qian, J., & Strahan, P. E. (2007). How laws and institutions shape financial contracts: The case of bank loans. Journal of Finance, 62(6), 2803–2834. https://doi.org/10.1111/j.1540-6261.2007.01293.x
Ranjan, P., & Lee, J. Y. (2007). Contract enforcement and international trade. Economics and Politics, 19(2), 191–218. https://doi.org/10.1111/j.1468-0343.2007.00308.x
Rodano, G., Serrano-Velarde, N., & Tarantino, E. (2016). Bankruptcy law and bank financing. Journal of Financial Economics, 120(2), 363–382. https://doi.org/10.1016/j.jfineco.2016.01.016
Schreyer, M., Sattarov, T., Borth, D., Dengel, A., & Reimer, B. (2017). Detection of anomalies in large scale accounting data using deep autoencoder networks. arXiv preprint arXiv:1709.05254.
Shah, A., Shah, H. A., Smith, J. M., & Labianca, G. J. (2017). Judicial efficiency and capital structure: An international study. Journal of Corporate Finance, 44, 255–274. https://doi.org/10.1016/j.jcorpfin.2017.03.012
Shah, H., A., & Shah, A. (2016). The relationship between judicial efficiency and corporate cash holdings: An international study. Economic Modelling, 59, 448–462. https://doi.org/10.1016/j.econmod.2016.08.016
Shubita, M. F. (2019). The impact of working capital management on cash holdings of large and small firms: Evidence from Jordan. Investment Management & Financial Innovations, 16(3), 76–86. https://doi.org/10.21511/imfi.16(3).2019.08
Silva, M. C. A. (2018). Output-specific inputs in DEA: An application to courts of justice in Portugal. Omega, 79, 43–53. https://doi.org/10.1016/j.omega.2017.07.006
Soltanolkotabi, M., & Candes, E. J. (2012). A geometric analysis of subspace clustering with outliers. The Annals of Statistics, 40(4), 2195–2238. https://doi.org/10.1214/12-AOS1034
Stanghellini, L. (2008). Le Crisi di Impresa tra Diritto ed Economia. Il Mulino, Bologna, Italy.
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