Entrepreneurial Finance

**131**

**Chapter 8**

**Abstract**

Does Financial Institution

of Entrepreneurship?

*and Veronica Marozzo*

development of local financial systems.

entrepreneurship, research spin-off

**1. Introduction**

Proximity Affect the Development

*Francesco Fasano, Maurizio La Rocca, Tiziana La Rocca* 

The present contribution joins the stream of research investigating the relationship between local financial development, economic growth, and entrepreneurship. Relevant contributions highlighted that the probability of an individual to start a new business is higher when he/she moves from the least financially developed region to the most financially developed one. Indeed, higher levels of local financial development allow for easier access to external funds, which are crucial for the growth of new businesses. In this entrepreneurial context, the need of financial resources is especially relevant for research spin-offs (ROSs), which require significant resources to transfer to the market their innovative technologies. This chapter deepens the role of local financial development on entrepreneurship and, in particular, on research spin-offs. Empirical evidence highlight that at the time of ROSs' incubation, local financial development does not affect the performance of spin-offs, as they mainly rely on Universities and public contributions. Vice versa, when the RSOs enter the market, they are more in need of funds from the financial system, for which local financial development interestingly becomes strongly relevant to them, affecting corporate performance. Consequently, despite the internationalization of financial markets, policymakers should carefully encourage entrepreneurship through the

**Keywords:** financial system, local financial development, local context,

The firm's success typically depends on a number of internal drivers and external opportunities that can be exploited. In particular, the potential use of external financial resources and the eventual difficulty to access to these resources represent the greatest challenges that a firm must overcome nowadays. Manzocchi et al. [1] state that *"*External drivers encompass various aspects of the environmental context in which a firm operates, such as the standard and efficiency of the public administration, national or regional credit conditions, physical infrastructures and intangible

#### **Chapter 8**

## Does Financial Institution Proximity Affect the Development of Entrepreneurship?

*Francesco Fasano, Maurizio La Rocca, Tiziana La Rocca and Veronica Marozzo*

#### **Abstract**

The present contribution joins the stream of research investigating the relationship between local financial development, economic growth, and entrepreneurship. Relevant contributions highlighted that the probability of an individual to start a new business is higher when he/she moves from the least financially developed region to the most financially developed one. Indeed, higher levels of local financial development allow for easier access to external funds, which are crucial for the growth of new businesses. In this entrepreneurial context, the need of financial resources is especially relevant for research spin-offs (ROSs), which require significant resources to transfer to the market their innovative technologies. This chapter deepens the role of local financial development on entrepreneurship and, in particular, on research spin-offs. Empirical evidence highlight that at the time of ROSs' incubation, local financial development does not affect the performance of spin-offs, as they mainly rely on Universities and public contributions. Vice versa, when the RSOs enter the market, they are more in need of funds from the financial system, for which local financial development interestingly becomes strongly relevant to them, affecting corporate performance. Consequently, despite the internationalization of financial markets, policymakers should carefully encourage entrepreneurship through the development of local financial systems.

**Keywords:** financial system, local financial development, local context, entrepreneurship, research spin-off

#### **1. Introduction**

The firm's success typically depends on a number of internal drivers and external opportunities that can be exploited. In particular, the potential use of external financial resources and the eventual difficulty to access to these resources represent the greatest challenges that a firm must overcome nowadays. Manzocchi et al. [1] state that *"*External drivers encompass various aspects of the environmental context in which a firm operates, such as the standard and efficiency of the public administration, national or regional credit conditions, physical infrastructures and intangible

capital. Most of these external factors may affect the productivity performance of rather similar firms if they are located in different areas of the same country*".*

Therefore, the characteristics of the local environment in which firms operate are at the core of the potential success of a firm. Among the variety of features related to the environment, the role of the financial system is noteworthy in affecting the competitiveness of a firm. With this regard, a large empirical literature, which begins with the work of King and Levine [2], shows that the development of the financial system is important for the overall economic growth at the country level and also directly for firms' performance [2–4]. As suggested by Guiso et al. [5], the local financial context is considered as a priority by small and medium-sized firms (SMEs), which means that the success of a firm depends on the possibility to exploit the opportunities provided by the external environment. The degree of development of the local financial system (i.e. a specific financial system in a definite geographic area, smaller than the national context) strongly shapes business activities [5] and is especially important for "financially constrained" firms. Such firms have difficult access to the financial market because they face asymmetric information problems [6]. In particular, the access to external financial resources, the amount of credit available and the conditions provided by the banks can differently affect firms' startup, survivorship and corporate performance, according to the area where the firm is located. Local areas with higher levels of financial development can better support firms' growth processes. Entrepreneurial venture and, in general, SMEs, that are typical informational opaque firms, are supposed to grow faster in economies characterized by relevant financial development. With this regard, local financial development has a key role on entrepreneurship. Noteworthy contributions argue that the opportunity to start-up a new entrepreneurial activity, where informational opacity is a very relevant driver, is higher in those contexts where the access to external financial market is higher [5], especially when bank competition is strong [7].

Accounting for these stylized facts, this chapter intents to examine the potential effect of local financial development on entrepreneurship, with a particular focus on new high-tech firms, such as research spin-off (RSOs). RSOs are very special start-up firms that are founded with the aim to exploit technological knowledge that originated within a University or a Research institute setting, in order to develop products or services. Considering that innovation is the root of the economic success and the development of a country, it is important an effective way to transfer technology from University and Research Center into the market, for which the role of RSOs is crucial. Thus, understanding how the local financial context affects the performance of RSOs is useful to provide practical implications to sustain corporate development and, in general, the economic growth of nations.

While some papers studying the impact of academic spin-offs at the local level did not take into account direct measure of local context [8], others investigating the factors that foster the creation of academic spin-off directly examined the role of the local context [9]. However, there is a gap in the literature due to the fact that until recently nobody scrutinized the role of the local financial context on RSOs. From one side, it could be argued that the degree of the development of the financial system does not affect RSOs business because this kind of firm works under the University arms' length, which is a sort of protected environment where financial resources mainly come from public contributions and research projects. However, on the other side, this could be true in the early stage of the RSOs or until the time of entrance into the product market. At this time, for many reasons (the need to have a wider production plane to deal with commercialization, having the need to financially support the payments to suppliers and customers with different time horizon, etc.) the degree of financial development in the local area where a firm is

**133**

*Does Financial Institution Proximity Affect the Development of Entrepreneurship?*

based on could become very relevant. In this context, in local settings with efficient financial markets, financial intermediaries should be able to provide better assess for the feasibility of RSOs' initiatives. Consequently, a key implication for managers is that RSOs should try to look for external financial resources in well-developed local financial areas. Indeed, in such contexts RSOs have fewer difficulties in obtaining outside funding and, as a result, they can easily finance their current

This contribution has also implications for policy makers by showing that despite the internalization of financial markets, the local financial context is still relevant for entrepreneurship. Indeed, the growth of RSOs depends on their ability to catch investment opportunities. The presence of developed financial systems increases the availability of funding in a specific geographic area and should be therefore encouraged. Moreover, policymakers could develop new instruments, such as online lending or the figure of financial promoters, which allow RSOs to access external debt. Such instruments could increase local financial development and help RSOs in their negotiations with banks or bring alternative sources of financing, especially in those provinces where the local banking system is poor. The chapter is structured as follows. We describe the role of the financial system on economic growth in Paragraph 2. Paragraph 3 studies how local financial development could help corporate activities. Paragraph 4 moves one step further and investigates the role of the local financial development on entrepreneurship, while paragraph 5 specifically studies the impact of local financial development on research spin-offs. Finally, paragraph 6 provides some conclusions and

The relationship between the financial system and economic development is based on the key role of the services that the financial system provides to the companies [2]. The presence of information asymmetries and significant transaction costs highlights

• efficient risk-sharing in each period (risk-sharing in market-based systems and

.

<sup>1</sup> Classical economic models, based on the concept of market equilibrium, Pareto efficiency and the application of theorems, such Fisher's separation Theorem (1930), show that economic operators face little consistency with the economic reality. Only recently analyses are studying market frictions, such as the role of information asymmetries, agency and transaction costs. Particularly interesting also are the market microstructure studies that try to determine the weight of transaction costs on the markets and

<sup>3</sup> The concaveness of utility curves creates a mismatching between income and consumption flows. Economic agents prefer to have uniform consumption flows over time, while income streams have fluctuating patterns. The financial system allows to lend and borrow in such a way as to ensure uniform

<sup>4</sup> For example, if there was no stock market, all the risk would fall on the owner and few entrepreneurs

;

as they guarantee2

:

*DOI: http://dx.doi.org/10.5772/intechopen.93919*

activities and growth opportunities.

**2. Financial system and economic growth**

the fundamental role of the financial systems [4]1

• intertemporal reallocation of consumption3

<sup>2</sup> For a deep analysis on the functions of the financial system, see [10, 11].

flows. This function is critical regardless of the presence of risk in the system.

risk-taking in bank-based systems)4

why the markets are more or less liquid.

would undertake innovative but very risky projects.

• efficient allocation of resources among alternative projects;

implications.

#### *Does Financial Institution Proximity Affect the Development of Entrepreneurship? DOI: http://dx.doi.org/10.5772/intechopen.93919*

based on could become very relevant. In this context, in local settings with efficient financial markets, financial intermediaries should be able to provide better assess for the feasibility of RSOs' initiatives. Consequently, a key implication for managers is that RSOs should try to look for external financial resources in well-developed local financial areas. Indeed, in such contexts RSOs have fewer difficulties in obtaining outside funding and, as a result, they can easily finance their current activities and growth opportunities.

This contribution has also implications for policy makers by showing that despite the internalization of financial markets, the local financial context is still relevant for entrepreneurship. Indeed, the growth of RSOs depends on their ability to catch investment opportunities. The presence of developed financial systems increases the availability of funding in a specific geographic area and should be therefore encouraged. Moreover, policymakers could develop new instruments, such as online lending or the figure of financial promoters, which allow RSOs to access external debt. Such instruments could increase local financial development and help RSOs in their negotiations with banks or bring alternative sources of financing, especially in those provinces where the local banking system is poor.

The chapter is structured as follows. We describe the role of the financial system on economic growth in Paragraph 2. Paragraph 3 studies how local financial development could help corporate activities. Paragraph 4 moves one step further and investigates the role of the local financial development on entrepreneurship, while paragraph 5 specifically studies the impact of local financial development on research spin-offs. Finally, paragraph 6 provides some conclusions and implications.

#### **2. Financial system and economic growth**

The relationship between the financial system and economic development is based on the key role of the services that the financial system provides to the companies [2]. The presence of information asymmetries and significant transaction costs highlights the fundamental role of the financial systems [4]1 as they guarantee2 :


*Entrepreneurship - Contemporary Issues*

and, in general, the economic growth of nations.

While some papers studying the impact of academic spin-offs at the local level did not take into account direct measure of local context [8], others investigating the factors that foster the creation of academic spin-off directly examined the role of the local context [9]. However, there is a gap in the literature due to the fact that until recently nobody scrutinized the role of the local financial context on RSOs. From one side, it could be argued that the degree of the development of the financial system does not affect RSOs business because this kind of firm works under the University arms' length, which is a sort of protected environment where financial resources mainly come from public contributions and research projects. However, on the other side, this could be true in the early stage of the RSOs or until the time of entrance into the product market. At this time, for many reasons (the need to have a wider production plane to deal with commercialization, having the need to financially support the payments to suppliers and customers with different time horizon, etc.) the degree of financial development in the local area where a firm is

capital. Most of these external factors may affect the productivity performance of rather similar firms if they are located in different areas of the same country*".*

Therefore, the characteristics of the local environment in which firms operate are at the core of the potential success of a firm. Among the variety of features related to the environment, the role of the financial system is noteworthy in affecting the competitiveness of a firm. With this regard, a large empirical literature, which begins with the work of King and Levine [2], shows that the development of the financial system is important for the overall economic growth at the country level and also directly for firms' performance [2–4]. As suggested by Guiso et al. [5], the local financial context is considered as a priority by small and medium-sized firms (SMEs), which means that the success of a firm depends on the possibility to exploit the opportunities provided by the external environment. The degree of development of the local financial system (i.e. a specific financial system in a definite geographic area, smaller than the national context) strongly shapes business activities [5] and is especially important for "financially constrained" firms. Such firms have difficult access to the financial market because they face asymmetric information problems [6]. In particular, the access to external financial resources, the amount of credit available and the conditions provided by the banks can differently affect firms' startup, survivorship and corporate performance, according to the area where the firm is located. Local areas with higher levels of financial development can better support firms' growth processes. Entrepreneurial venture and, in general, SMEs, that are typical informational opaque firms, are supposed to grow faster in economies characterized by relevant financial development. With this regard, local financial development has a key role on entrepreneurship. Noteworthy contributions argue that the opportunity to start-up a new entrepreneurial activity, where informational opacity is a very relevant driver, is higher in those contexts where the access to external financial market is higher [5], especially when bank competition is strong [7]. Accounting for these stylized facts, this chapter intents to examine the potential effect of local financial development on entrepreneurship, with a particular focus on new high-tech firms, such as research spin-off (RSOs). RSOs are very special start-up firms that are founded with the aim to exploit technological knowledge that originated within a University or a Research institute setting, in order to develop products or services. Considering that innovation is the root of the economic success and the development of a country, it is important an effective way to transfer technology from University and Research Center into the market, for which the role of RSOs is crucial. Thus, understanding how the local financial context affects the performance of RSOs is useful to provide practical implications to sustain corporate development

**132**

<sup>1</sup> Classical economic models, based on the concept of market equilibrium, Pareto efficiency and the application of theorems, such Fisher's separation Theorem (1930), show that economic operators face little consistency with the economic reality. Only recently analyses are studying market frictions, such as the role of information asymmetries, agency and transaction costs. Particularly interesting also are the market microstructure studies that try to determine the weight of transaction costs on the markets and why the markets are more or less liquid.

<sup>2</sup> For a deep analysis on the functions of the financial system, see [10, 11].

<sup>3</sup> The concaveness of utility curves creates a mismatching between income and consumption flows. Economic agents prefer to have uniform consumption flows over time, while income streams have fluctuating patterns. The financial system allows to lend and borrow in such a way as to ensure uniform flows. This function is critical regardless of the presence of risk in the system.

<sup>4</sup> For example, if there was no stock market, all the risk would fall on the owner and few entrepreneurs would undertake innovative but very risky projects.

Studies on the relationship between the financial system and economic growth move from the work of Schumpeter [12], who highlighted the positive contribution of a developed financial system to the growth of the entire economy. According to his idea of "destructive creativity", an efficient financial system would be able to sustain radical innovations in the product market. This sustain consists in supporting the creativity and innovation of new companies that are in need of external financial resources and that cannot provide collateral activities.

Although someone observed that the role of the financial system and institutions has been overestimated [13], in general, the extant literature seems to empirically reveal the importance of the relationship between the financial system and economic growth [4]. This is a line of research that subsequently extended the analysis to the relationship between the development of the financial system and the growth of specific industrial sectors and, later, it focused on the impact of the activities of individual companies [14–16]. In particular, the extant literature [15] showed that companies operating in sectors where the availability of high external financial resources is crucial grow faster in the presence of a developed financial system, both if it's a bank-based or a market-based context<sup>5</sup> . Some international analyses compared the relationship between the financial system and economic development in bank-based countries and market-based countries. The controversial empirical evidence could not attribute the preeminence of one over the other economy [17].

From another perspective, the financial system has its own identity, that is different although related to the legal and enforcement system. Such identity is able to offer a range of essential services in supporting firms' growth [17]. With this regard, the services offered by a financial system play a key influence on a country's industrial growth6 .

Therefore, the literature suggests that the quality and efficiency of the financial system are fundamental to supporting both existing and new entrepreneurial activities.

#### **3. Which role for local financial development to sustain business activities?**

The integration and internationalization of the financial markets could limit the relevance of local financial development on firms' growth [5]. The consequence of such integration is that the financial markets tend to converge toward only one single great market. According to this perspective, companies with growth opportunities, a competitive advantage, and managerial capabilities should be able to overcome the obstacles associated with an inefficient local financial system by moving on the international market. On the contrary, the vast majority of small entrepreneurs could look for funds in the local financial system, as personal point of refecences at the first place, without a minimal idea about the chances to move in the international markets.

Relatively recent literature [5] suggests that the different levels of development and efficiency of the financial system within a single country make those geographical areas with a higher level of development and efficiency better able to assess the feasibility of new initiatives and, by funding them, support their growth.

**135**

*Does Financial Institution Proximity Affect the Development of Entrepreneurship?*

profitability and future potential projects of their customers [19].

development opportunities, limiting the growth of companies.

among different development in local areas/States [24].

**4. Local financial development and entrepreneurship**

In light of this, the level of development and efficiency of the local financial

Moreover, local financial development is especially important for SMEs and the startup of new business initiatives, as large companies should be able to easily enter the financial market, overcoming the local difficulties of an under-developed and

Companies with profitable growth capabilities could overcome the obstacles associated with an inefficient local financial system by relying on the international market. For example, in some countries, the activation and maintenance of a national financial market could be considered not relevant given the possibility of companies to be listed in foreign markets (such as Nasdaq) [5]. However, this phenomenon presents distortions and inefficiencies. Indeed, large enterprises enter the international financial markets, overcoming the local difficulties of an undeveloped and inefficient financial system, while small and medium-sized enterprises are more in need of local financial support. The inability of the financial system to appreciate, at the local level, the quality of companies' investment projects hampers

The different level of development of the financial system among local areas influences the intensity of business growth, limiting the economic convenience of venture capitals. This could limit corporate financial decisions, constraining firms and generating credit rationing problems. In other words, firms grow faster when they are located in regions where access to credit is easier, and financial intermediaries appreciate the quality of investment projects [5]. Besides, in such regions, there are more businesses per capita and the rate of new business creation is higher. Main studies on this topic [5, 20] are based on the Italian context because it represents an ideal setting to study the role of local financial development on RSOs. In a country unified for almost 160 years where the same law applies there is a large persistence of differences in financial development across Italian provinces that make Italy a very suitable environment to investigate the effects of local financial development. A similar context can be found in Spain, a country that, likewise Italy, is bank-based and civil low. For these reasons, some other contributions investigate the effects of local financial development in Spain [21–23]. Empirical evidences also show that within the United States there is a relevant role on business activities

Recent literature suggests that entrepreneurship and, in general, the starting of new firms, is affected by the quality of the financial system. The improved access to external funds (credit availability) provided by financial development increases the opportunities to become an entrepreneur. Firm creation is higher in local markets with more bank competition [7] and is influenced by the development in the local financial market [5]. According to the work of Guiso et al. [5], the probability that a person becomes self-employed is indeed higher in more financially developed areas (5.6 percentage points). This result is consistent with the findings found based on US firms [25]. Similar results are obtained using as dependent variable the number of new firms in an area scaled by the total number of inhabitants. Moving from the least financially developed region to the most financially developed one, it is possible

With this regard, a growing literature found that the "proximity" between financial intermediaries and firms plays a significant role in lending decisions [5]. Banks lend to firms operating in the same area, as it is easier to control the reliability,

*DOI: http://dx.doi.org/10.5772/intechopen.93919*

inefficient financial system.

system influences the economic growth of companies.

<sup>5</sup> For a review see [17, 18].

<sup>6</sup> The literature documents the presence of a relevant cause-and-effect relationship between types and quality of services offered by the financial system and economic development, underying the need for further empirical research on this issue [17].

#### *Does Financial Institution Proximity Affect the Development of Entrepreneurship? DOI: http://dx.doi.org/10.5772/intechopen.93919*

In light of this, the level of development and efficiency of the local financial system influences the economic growth of companies.

With this regard, a growing literature found that the "proximity" between financial intermediaries and firms plays a significant role in lending decisions [5]. Banks lend to firms operating in the same area, as it is easier to control the reliability, profitability and future potential projects of their customers [19].

Moreover, local financial development is especially important for SMEs and the startup of new business initiatives, as large companies should be able to easily enter the financial market, overcoming the local difficulties of an under-developed and inefficient financial system.

Companies with profitable growth capabilities could overcome the obstacles associated with an inefficient local financial system by relying on the international market. For example, in some countries, the activation and maintenance of a national financial market could be considered not relevant given the possibility of companies to be listed in foreign markets (such as Nasdaq) [5]. However, this phenomenon presents distortions and inefficiencies. Indeed, large enterprises enter the international financial markets, overcoming the local difficulties of an undeveloped and inefficient financial system, while small and medium-sized enterprises are more in need of local financial support. The inability of the financial system to appreciate, at the local level, the quality of companies' investment projects hampers development opportunities, limiting the growth of companies.

The different level of development of the financial system among local areas influences the intensity of business growth, limiting the economic convenience of venture capitals. This could limit corporate financial decisions, constraining firms and generating credit rationing problems. In other words, firms grow faster when they are located in regions where access to credit is easier, and financial intermediaries appreciate the quality of investment projects [5]. Besides, in such regions, there are more businesses per capita and the rate of new business creation is higher.

Main studies on this topic [5, 20] are based on the Italian context because it represents an ideal setting to study the role of local financial development on RSOs. In a country unified for almost 160 years where the same law applies there is a large persistence of differences in financial development across Italian provinces that make Italy a very suitable environment to investigate the effects of local financial development. A similar context can be found in Spain, a country that, likewise Italy, is bank-based and civil low. For these reasons, some other contributions investigate the effects of local financial development in Spain [21–23]. Empirical evidences also show that within the United States there is a relevant role on business activities among different development in local areas/States [24].

#### **4. Local financial development and entrepreneurship**

Recent literature suggests that entrepreneurship and, in general, the starting of new firms, is affected by the quality of the financial system. The improved access to external funds (credit availability) provided by financial development increases the opportunities to become an entrepreneur. Firm creation is higher in local markets with more bank competition [7] and is influenced by the development in the local financial market [5]. According to the work of Guiso et al. [5], the probability that a person becomes self-employed is indeed higher in more financially developed areas (5.6 percentage points). This result is consistent with the findings found based on US firms [25]. Similar results are obtained using as dependent variable the number of new firms in an area scaled by the total number of inhabitants. Moving from the least financially developed region to the most financially developed one, it is possible

*Entrepreneurship - Contemporary Issues*

economy [17].

industrial growth6

**activities?**

the international markets.

<sup>5</sup> For a review see [17, 18].

further empirical research on this issue [17].

activities.

.

Studies on the relationship between the financial system and economic growth move from the work of Schumpeter [12], who highlighted the positive contribution of a developed financial system to the growth of the entire economy. According to his idea of "destructive creativity", an efficient financial system would be able to sustain radical innovations in the product market. This sustain consists in supporting the creativity and innovation of new companies that are in need of external

Although someone observed that the role of the financial system and institutions has been overestimated [13], in general, the extant literature seems to empirically reveal the importance of the relationship between the financial system and economic growth [4]. This is a line of research that subsequently extended the analysis to the relationship between the development of the financial system and the growth of specific industrial sectors and, later, it focused on the impact of the activities of individual companies [14–16]. In particular, the extant literature [15] showed that companies operating in sectors where the availability of high external financial resources is crucial grow faster in the presence of a developed financial

analyses compared the relationship between the financial system and economic development in bank-based countries and market-based countries. The controversial empirical evidence could not attribute the preeminence of one over the other

From another perspective, the financial system has its own identity, that is different although related to the legal and enforcement system. Such identity is able to offer a range of essential services in supporting firms' growth [17]. With this regard, the services offered by a financial system play a key influence on a country's

Therefore, the literature suggests that the quality and efficiency of the financial

system are fundamental to supporting both existing and new entrepreneurial

**3. Which role for local financial development to sustain business** 

The integration and internationalization of the financial markets could limit the relevance of local financial development on firms' growth [5]. The consequence of such integration is that the financial markets tend to converge toward only one single great market. According to this perspective, companies with growth opportunities, a competitive advantage, and managerial capabilities should be able to overcome the obstacles associated with an inefficient local financial system by moving on the international market. On the contrary, the vast majority of small entrepreneurs could look for funds in the local financial system, as personal point of refecences at the first place, without a minimal idea about the chances to move in

Relatively recent literature [5] suggests that the different levels of development and efficiency of the financial system within a single country make those geographical areas with a higher level of development and efficiency better able to assess the feasibility of new initiatives and, by funding them, support their growth.

<sup>6</sup> The literature documents the presence of a relevant cause-and-effect relationship between types and quality of services offered by the financial system and economic development, underying the need for

. Some international

financial resources and that cannot provide collateral activities.

system, both if it's a bank-based or a market-based context<sup>5</sup>

**134**

to observe an increase of the ratio of new firms to the population by 25 percent, roughly one firm for every 400 inhabitants. Also, this latter result is consistent with the findings based on the US [26].

The results based on the Italian context are robust to many controls. First, the level of per capita GDP as a measure of economic development of the area. Moreover, the efficiency of the local courts to account for differences in the enforcement system at the local level. In addition, the local level of "social capital" à la Putnam. Finally, they use instrumental variables in order to avoid any possibility of endogeneity related to the connection between the measure of financial development with some unobserved determinants of entrepreneurship.

Additionally, better access to funds allows people to become entrepreneurs at a younger age (earlier, on average, five years). Hence, in more financially developed regions the average age of existing entrepreneurs should be lower.

Therefore, even in a world of international integration of financial markets, where funds can freely flow cross-country, the quality of the local financial system continues to matter even to promote firm creation and entrepreneurship.

Although local financial development increases the entrepreneurship rate, there are still just a few papers investigating how local financial development affects business activities of new firms. For instance, a recent work studied the financial decisions of start-ups shaped by local financial development [27]. This contribution specifically investigates the effects of local banking development on the debt financing of new firms using a large sample of Italian firms [27]. Controlling for potential endogeneity issues, results show that new firms are more likely to use bank debt and have higher leverage in provinces with higher financial development. While traditional literature [28] suggests that new firms are mainly financed by equity capital, this study provides new and nuanced evidence on the role of local banking development for the debt financing of new firms.

#### **5. Local financial development and research spin-off**

The importance of research spin-offs in supporting economic and technological growth is crucial, as they transfer technology and innovation to the market [29]. Considering their relevance, it is of great interest the way to boost RSOs creation, as a way to promote competitiveness among countries. In this interesting line of research, it is interesting to scrutinize the relationship between local financial development and RSOs. As reported in literature, the startup of a company by a research organization is an important way to commercialize the results of a public research [30], and contributes to economic and social welfare by influencing the entire regional development [31, 32]. In fact, the generation and application of new ideas, technologies and scientific knowledge are widely recognized as a prerequisite for economic development, job creation and the formation of a competitive industrial structure [33].

A spin-off is a new legal and economic entity, created through the "separation" of a resource from an existing entity (parent organization) to carry out a new task, or reorganizing a task previously carried out in the entity of origin. When it comes to RSOs, it can be referred to those entities created through the separation from a resource (typically a new technology derived from academic research result), transferred to a new company through a voluntary process supported by the University [34]. RSO is a new firm in which two elements can be found: 1) the initiative must involve people employed by Universities or Research Institutes (typically researchers); 2) the new entity must acquire a technology developed within the University itself and, after the phase of development, it transfers this technology to

**137**

*Does Financial Institution Proximity Affect the Development of Entrepreneurship?*

the market [35]. Once defined the spinoffs and clarified their role, it is important to underlying that these legal entities are important because: 1) they contribute to the local economic development; 2) they make easier the commercialization of new technologies; 3) they provide support to main activities of research; 4) they have above-average performance; 5) they generate, if compared to licensing, more

The literature about spinoffs is extensive. In particular, an interesting work [37] carried out a comparative investigation between 12 Italian and Swedish spin-offs, observing that an increase in productivity, in terms of public research results, due to the activity of spinoffs. More in general, the success of spin-offs depends from several factors [38]. Among those factors, many studies have highlighted the role played by the financial system. It is well known that the ability of companies to access external financial resources with positive effects is determined also by the presence of a well-developed financial system [39]. Access to external financial resources can be crucial for success in the long run of spin-offs as well as for other

The extant literature found a positive relationship between the level of local financial development and the number of new spinoffs [42]. However, Agarwal and Bayus [43] showed, "it takes on average 14 years before a technology patented at a research institute reaches 2% of its peak sales at market maturity". Typically research spinoffs face a long incubation period before the commercialization of the product. Although the different phases of spinoff's life cycle vary a lot across the different industries, there is, in general, a considerable timescale between the first phase of their life cycle and the sales takeoff. Spinoff's life cycle can be summed up as follows [44]. A research phase, from an idea into a prototype, a second phase characterized by an intense activity of fundraising, that can be called the opportunity framing phase [45], or alternatively the gestation [46] or pre-start-up phase. A third phase characterized by an intense activity for developing the prototype in order to understand if it can have an effective commercial use. Once the spinoff has productively commercialized its product, established contracts with customers and its sales take off, then it enters in a new phase which may be labeled the post-start-up

During the first three-phase spinoffs are usually located inside dedicated areas that Universities make available (also known as "incubators"), where spinoffs exploit all the academic assets (laboratories, staff, etcetera). In this phase, sales are

There is a typical structure break at the type RSOs move from an incubator stage with no sales and only revenues in terms of government contributions and/or research projects, to a stage where the RSO is financially autonomous, taking off on the product market, commercializing its products/services and having selling

Considering this cycle in the RSO, La Rocca et al. [48] argue that spin-off works on the prototype, preparing the event of the product launch entering into the market and figuring out how to set up the equipment for a production under steady conditions. The incubation period can be assessed considering that spinoffs are fully dependent from Universities and public contributions. Financial resources availability from financial institutions or public markets play a subordinate role at this stage of the spinoff. Until this stage, the role of the external financial context is

It is at the time of the entrance in the product market, facing directly costumers, competitors and different financial issues, that the way of doing business for RSOs is going to change. RSOs start to become independent from Universities and public contributions. At this time, local financial development positively influences RSO

*DOI: http://dx.doi.org/10.5772/intechopen.93919*

revenues for universities [36].

low-tech new firms [40, 41].

[47] or maturity phase [46].

meaningless and negligible.

mainly equal to zero.

revenues.

#### *Does Financial Institution Proximity Affect the Development of Entrepreneurship? DOI: http://dx.doi.org/10.5772/intechopen.93919*

the market [35]. Once defined the spinoffs and clarified their role, it is important to underlying that these legal entities are important because: 1) they contribute to the local economic development; 2) they make easier the commercialization of new technologies; 3) they provide support to main activities of research; 4) they have above-average performance; 5) they generate, if compared to licensing, more revenues for universities [36].

The literature about spinoffs is extensive. In particular, an interesting work [37] carried out a comparative investigation between 12 Italian and Swedish spin-offs, observing that an increase in productivity, in terms of public research results, due to the activity of spinoffs. More in general, the success of spin-offs depends from several factors [38]. Among those factors, many studies have highlighted the role played by the financial system. It is well known that the ability of companies to access external financial resources with positive effects is determined also by the presence of a well-developed financial system [39]. Access to external financial resources can be crucial for success in the long run of spin-offs as well as for other low-tech new firms [40, 41].

The extant literature found a positive relationship between the level of local financial development and the number of new spinoffs [42]. However, Agarwal and Bayus [43] showed, "it takes on average 14 years before a technology patented at a research institute reaches 2% of its peak sales at market maturity". Typically research spinoffs face a long incubation period before the commercialization of the product. Although the different phases of spinoff's life cycle vary a lot across the different industries, there is, in general, a considerable timescale between the first phase of their life cycle and the sales takeoff. Spinoff's life cycle can be summed up as follows [44]. A research phase, from an idea into a prototype, a second phase characterized by an intense activity of fundraising, that can be called the opportunity framing phase [45], or alternatively the gestation [46] or pre-start-up phase. A third phase characterized by an intense activity for developing the prototype in order to understand if it can have an effective commercial use. Once the spinoff has productively commercialized its product, established contracts with customers and its sales take off, then it enters in a new phase which may be labeled the post-start-up [47] or maturity phase [46].

During the first three-phase spinoffs are usually located inside dedicated areas that Universities make available (also known as "incubators"), where spinoffs exploit all the academic assets (laboratories, staff, etcetera). In this phase, sales are mainly equal to zero.

There is a typical structure break at the type RSOs move from an incubator stage with no sales and only revenues in terms of government contributions and/or research projects, to a stage where the RSO is financially autonomous, taking off on the product market, commercializing its products/services and having selling revenues.

Considering this cycle in the RSO, La Rocca et al. [48] argue that spin-off works on the prototype, preparing the event of the product launch entering into the market and figuring out how to set up the equipment for a production under steady conditions. The incubation period can be assessed considering that spinoffs are fully dependent from Universities and public contributions. Financial resources availability from financial institutions or public markets play a subordinate role at this stage of the spinoff. Until this stage, the role of the external financial context is meaningless and negligible.

It is at the time of the entrance in the product market, facing directly costumers, competitors and different financial issues, that the way of doing business for RSOs is going to change. RSOs start to become independent from Universities and public contributions. At this time, local financial development positively influences RSO

*Entrepreneurship - Contemporary Issues*

the findings based on the US [26].

to observe an increase of the ratio of new firms to the population by 25 percent, roughly one firm for every 400 inhabitants. Also, this latter result is consistent with

The results based on the Italian context are robust to many controls. First, the level of per capita GDP as a measure of economic development of the area. Moreover, the efficiency of the local courts to account for differences in the enforcement system at the local level. In addition, the local level of "social capital" à la Putnam. Finally, they use instrumental variables in order to avoid any possibility of endogeneity related to the connection between the measure of financial develop-

Additionally, better access to funds allows people to become entrepreneurs at a younger age (earlier, on average, five years). Hence, in more financially developed

Therefore, even in a world of international integration of financial markets, where funds can freely flow cross-country, the quality of the local financial system

Although local financial development increases the entrepreneurship rate, there

The importance of research spin-offs in supporting economic and technological growth is crucial, as they transfer technology and innovation to the market [29]. Considering their relevance, it is of great interest the way to boost RSOs creation, as a way to promote competitiveness among countries. In this interesting line of research, it is interesting to scrutinize the relationship between local financial development and RSOs. As reported in literature, the startup of a company by a research organization is an important way to commercialize the results of a public research [30], and contributes to economic and social welfare by influencing the entire regional development [31, 32]. In fact, the generation and application of new ideas, technologies and scientific knowledge are widely recognized as a prerequisite for economic development, job creation and the formation of a competitive

A spin-off is a new legal and economic entity, created through the "separation" of a resource from an existing entity (parent organization) to carry out a new task, or reorganizing a task previously carried out in the entity of origin. When it comes to RSOs, it can be referred to those entities created through the separation from a resource (typically a new technology derived from academic research result), transferred to a new company through a voluntary process supported by the University [34]. RSO is a new firm in which two elements can be found: 1) the initiative must involve people employed by Universities or Research Institutes (typically researchers); 2) the new entity must acquire a technology developed within the University itself and, after the phase of development, it transfers this technology to

ment with some unobserved determinants of entrepreneurship.

regions the average age of existing entrepreneurs should be lower.

banking development for the debt financing of new firms.

**5. Local financial development and research spin-off**

continues to matter even to promote firm creation and entrepreneurship.

are still just a few papers investigating how local financial development affects business activities of new firms. For instance, a recent work studied the financial decisions of start-ups shaped by local financial development [27]. This contribution specifically investigates the effects of local banking development on the debt financing of new firms using a large sample of Italian firms [27]. Controlling for potential endogeneity issues, results show that new firms are more likely to use bank debt and have higher leverage in provinces with higher financial development. While traditional literature [28] suggests that new firms are mainly financed by equity capital, this study provides new and nuanced evidence on the role of local

**136**

industrial structure [33].

performance [48]. The presence of a higher degree of local financial development and access to external sources of financing should better support spin-offs' funding decisions. In this context, financial institutions and public markets will be able to provide the financial support that best fit RSOs' financial needs. The potential support that the financial markets provide to spinoffs shows its benefits once the product is commercialized. Such support resulted evident both in the short-run, to deal with all the economic transactions raised into the market, and also in the long-run, providing the right financial tools to support the acquisition of an industrial building, machines and equipment. In this case, the degree of development of a financial system represents a resource that gives the possibility to spin-offs to commercialize innovations. It is worth noting that in a matching sample of high-tech startups (not-RSOs) the impact of local financial development is always positive, meaning that the nature of the RSOs significantly affects the role of external finance [48].

At the time a RSO is incubated inside the University or Research Institute and its survival is totally and uniquely dependent from non-operational earnings, the ROS is *de facto* a "proto-company" still *in nuce*, but not really operative at this stage. As long as the survival of RSOs depends on collecting money from public contributions and start-up competition awards more than on their own sales, the degree of financial system development does not influence the performance of spinoffs.

Therefore, the kind of revenues a RSO is based on the degree of financial independence from Universities and public contributions that specifies the stage in the life-cycle of academic spin-offs. At the time of RSO incubation, when sales are equal to zero, local financial development does not matter for spin-off performance. Vice versa, at the time the RSO has to take-off in the product market, finding financial resources outside can be hampered by the condition of opacity information caused by information asymmetries that typically affect RSO. Development of local financial market influences positively spinoffs, originally created within universities and Public Research institutes, at a greater extent when RSOs become fully independent and completely free from public contributions, namely, when the RSO takes-off in the product market and it is not anymore incubated inside the University sites.

This chapter also has limitations, as it does not discuss the operating nature of RSOs and, more in general, the qualitative aspects of RSOs that could explain the relationship between local financial development and corporate performance.

Moreover, the extant literature did not studied how local financial development could affect corporate performance. However, it could be interesting for future research to investigate how this institutional factor shapes the growth of the firm and its value.

#### **6. Conclusion**

Local financial development has a crucial role for the economic growth [2]. Such relevance is due to the fact that higher levels of local financial development ease access to external financial sources, spurring firms' investments and, consequently, business success. The extant literature interestingly demonstrated that easier access to financial markets encourages entrepreneurship, because it facilitates the startup of new businesses in search of external funding, which is important to catch growth opportunities. One of the most important entrepreneurial businesses is represented by RSOs. Such companies play a key role on the global economy, as they transfer technology and innovation from University and Research Center into the market. RSOs are always in need to catch investing opportunities, as innovation is expensive and requires efficient financial systems. Indeed, in the absence of funding, productivity is constrained and RSOs difficultly get growth opportunities. In this context,

**139**

**Author details**

Francesco Fasano1

1 University of Calabria, Rende, Italy

2 University of Messina, Messina, Italy

provided the original work is properly cited.

\*, Maurizio La Rocca1

\*Address all correspondence to: francesco.fasano@unical.it

, Tiziana La Rocca<sup>2</sup>

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

and Veronica Marozzo2

*Does Financial Institution Proximity Affect the Development of Entrepreneurship?*

some interesting contributions highlighted that in countries where there is greater financial development, companies are more likely to innovate [49] and innovation is higher in firms that have access to external resources [50]. Hence, well-developed financial systems have a positive effect on entrepreneurship, corporate growth and,

Considering the relevance of local financial development for RSOs, the present chapter deepens the relationships between local financial development and the performance of entrepreneurial firms, with a focus on RSOs. Due to the intrinsic nature of these firms, La Rocca et al. [48] show that RSOs need a long period (incubation period) during which their research requires to be refined and engineered before being commercialized. During this period the main revenues and financial sources of spinoffs are made up of public contributions and prizes obtained from participation in startup competitions. At this early stage, the use of debt or other financial resources is limited and the role of local financial development is absent. Differently, at the end of the incubation period, the impact of local financial development on spinoffs' performance interestingly turns from negative to positive.

In the light of the above, this chapter provides important implications for firms,

which should carefully take into account the institutional setting in which they are embedded, and for policymakers, who should undertake important initiatives aimed at increasing local financial development. The key evidence of this chapter is that local financial development represents a strong tool in order to transfer new

*DOI: http://dx.doi.org/10.5772/intechopen.93919*

as a result, the company's performance.

innovative technologies into the market.

#### *Does Financial Institution Proximity Affect the Development of Entrepreneurship? DOI: http://dx.doi.org/10.5772/intechopen.93919*

some interesting contributions highlighted that in countries where there is greater financial development, companies are more likely to innovate [49] and innovation is higher in firms that have access to external resources [50]. Hence, well-developed financial systems have a positive effect on entrepreneurship, corporate growth and, as a result, the company's performance.

Considering the relevance of local financial development for RSOs, the present chapter deepens the relationships between local financial development and the performance of entrepreneurial firms, with a focus on RSOs. Due to the intrinsic nature of these firms, La Rocca et al. [48] show that RSOs need a long period (incubation period) during which their research requires to be refined and engineered before being commercialized. During this period the main revenues and financial sources of spinoffs are made up of public contributions and prizes obtained from participation in startup competitions. At this early stage, the use of debt or other financial resources is limited and the role of local financial development is absent. Differently, at the end of the incubation period, the impact of local financial development on spinoffs' performance interestingly turns from negative to positive.

In the light of the above, this chapter provides important implications for firms, which should carefully take into account the institutional setting in which they are embedded, and for policymakers, who should undertake important initiatives aimed at increasing local financial development. The key evidence of this chapter is that local financial development represents a strong tool in order to transfer new innovative technologies into the market.

#### **Author details**

*Entrepreneurship - Contemporary Issues*

significantly affects the role of external finance [48].

performance [48]. The presence of a higher degree of local financial development and access to external sources of financing should better support spin-offs' funding decisions. In this context, financial institutions and public markets will be able to provide the financial support that best fit RSOs' financial needs. The potential support that the financial markets provide to spinoffs shows its benefits once the product is commercialized. Such support resulted evident both in the short-run, to deal with all the economic transactions raised into the market, and also in the long-run, providing the right financial tools to support the acquisition of an industrial building, machines and equipment. In this case, the degree of development of a financial system represents a resource that gives the possibility to spin-offs to commercialize innovations. It is worth noting that in a matching sample of high-tech startups (not-RSOs) the impact of local financial development is always positive, meaning that the nature of the RSOs

At the time a RSO is incubated inside the University or Research Institute and its survival is totally and uniquely dependent from non-operational earnings, the ROS is *de facto* a "proto-company" still *in nuce*, but not really operative at this stage. As long as the survival of RSOs depends on collecting money from public contributions and start-up competition awards more than on their own sales, the degree of financial system development does not influence the performance of spinoffs. Therefore, the kind of revenues a RSO is based on the degree of financial independence from Universities and public contributions that specifies the stage in the life-cycle of academic spin-offs. At the time of RSO incubation, when sales are equal to zero, local financial development does not matter for spin-off performance. Vice versa, at the time the RSO has to take-off in the product market, finding financial resources outside can be hampered by the condition of opacity information caused by information asymmetries that typically affect RSO. Development of local financial market influences positively spinoffs, originally created within universities and Public Research institutes, at a greater extent when RSOs become fully independent and completely free from public contributions, namely, when the RSO takes-off in the product market and it is not anymore incubated inside the University sites.

This chapter also has limitations, as it does not discuss the operating nature of RSOs and, more in general, the qualitative aspects of RSOs that could explain the relationship between local financial development and corporate performance.

Moreover, the extant literature did not studied how local financial development could affect corporate performance. However, it could be interesting for future research to investigate how this institutional factor shapes the growth of the firm

Local financial development has a crucial role for the economic growth [2]. Such relevance is due to the fact that higher levels of local financial development ease access to external financial sources, spurring firms' investments and, consequently, business success. The extant literature interestingly demonstrated that easier access to financial markets encourages entrepreneurship, because it facilitates the startup of new businesses in search of external funding, which is important to catch growth opportunities. One of the most important entrepreneurial businesses is represented by RSOs. Such companies play a key role on the global economy, as they transfer technology and innovation from University and Research Center into the market. RSOs are always in need to catch investing opportunities, as innovation is expensive and requires efficient financial systems. Indeed, in the absence of funding, productivity is constrained and RSOs difficultly get growth opportunities. In this context,

**138**

and its value.

**6. Conclusion**

Francesco Fasano1 \*, Maurizio La Rocca1 , Tiziana La Rocca<sup>2</sup> and Veronica Marozzo2


\*Address all correspondence to: francesco.fasano@unical.it

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

### **References**

[1] Manzocchi S, Quintieri B, Santoni G. Internal vs. external firm productivity drivers. A study of the Italian counties. LLEE Luiss; 2014.

[2] King RG, Levine R. Finance and growth: Schumpeter might be right. Q J Econ 1993;108:717-37. https://doi. org/10.2307/2118406.

[3] Rajan RG, Zingales L. Banks and Markets: the Changing Character of European Finance. vol. Working Pa. 2003. https://doi.org/10.3386/w9595.

[4] Levine R. Financial development and economic growth: views and agenda. The World Bank; 1999.

[5] Guiso L, Sapienza P, Zingales L. Does local financial development matter? Q J Econ 2004;119:929-69. https://doi. org/10.1162/0033553041502162.

[6] Love I. Financial development and financing constraints: International evidence from the structural investment model. Rev Financ Stud 2003;16:765-91. https://doi.org/10.1093/rfs/hhg013.

[7] Di Patti EB, Dell'Ariccia G. Bank competition and firm creation. International Monetary Fund; 2001.

[8] Iacobucci D, Micozzi A. How to evaluate the impact of academic spinoffs on local development: an empirical analysis of the Italian case. J Technol Transf 2015;40:434-52. https://doi. org/10.1007/s10961-014-9357-8.

[9] Fini R, Grimaldi R, Sobrero M. Factors fostering academics to start up new ventures: an assessment of Italian founders' incentives. J Technol Transf 2009;34:380-402. https://doi. org/10.1007/s10961-008-9093-z.

[10] Allen F, Gale D. Comparing financial systems. MIT press; 2000. [11] Forestieri G, Mottura P. Il sistema finanziario. Egea; 2013.

[12] Schumpeter AJ. A Theory of Economic Development. Cambridge, MA, Harvard University Press.; 1911.

[13] Lucas Jr RE. On the mechanics of economic development. J Monet Econ 1988;22:3-42. https://doi. org/10.1016/0304-3932(88)90168-7.

[14] Levine R, Zervos S. Stock markets, banks, and economic growth. Am Econ Rev 1998:537-58.

[15] Rajan R, Zingales L. Financial development and growth. Am Econ Rev 1998;88:559-86.

[16] Demirgüç-Kunt A, Maksimovic V. Law, finance, and firm growth. J Finance 1998;53:2107-37. https://doi. org/10.1111/0022-1082.00084.

[17] Rajan RG, Zingales L. Financial systems, industrial structure, and growth. Oxford Rev Econ Policy 2001;17:467-82. https://doi.org/10.1093/ oxrep/17.4.467.

[18] Demirgüç-Kunt A, Levine R. Bank-based and market-based financial systems: Cross-country comparisons. In: (A. Demirgüç-Kunt and R. Levine E., editor., in Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development, MIT Press, Cambridge, MA.; 2001.

[19] Petersen MA, Rajan RG. Does distance still matter? The information revolution in small business lending. J Finance 2002;57:2533-70. https://doi. org/10.1111/1540-6261.00505.

[20] Deloof M, La Rocca M. Local financial development and the trade credit policy of Italian SMEs.

**141**

*Does Financial Institution Proximity Affect the Development of Entrepreneurship?*

[29] Chiesa V, Piccaluga A. Exploitation and diffusion of public research: the case of academic spin-off companies in Italy. R&D Manag 2000;30:329-40. https://doi. org/10.1111/1467-9310.00187.

[30] Czarnitzki D, Rammer C, Toole AA. University spin-offs and the "performance premium." Small Bus Econ 2014;43:309-26. https://doi. org/10.1007/s11187-013-9538-0.

[31] Bellini N, Ferrucci L. Ricerca universitaria e processi di innovazione: le piccole e medie imprese nel Progetto Link. vol. 188. FrancoAngeli; 2002.

des Technologietransfers und Anforderungen an seine Ausgestaltung., In: Pleschak F (ed) Technologietransfer, Anforderungen und Entwicklungstendenzen, Karlsruhe; 2003, p. 1-16.

poms.1080.01004.

2010.

[32] Pleschak F. Entwicklungstendenzen

[33] Atasu A, Van Wassenhove LN, Sarvary M. Efficient take-back legislation. Prod Oper Manag

[34] Palumbo R. Dall'Università al mercato. Governance e performance degli spinoff universitari in Italia: Governance e performance degli spinoff universitari in Italia. FrancoAngeli;

[35] Carayannis EG, Rogers EM, Kurihara K, Allbritton MM. Hightechnology spin-offs from

government R&D laboratories and research universities. Technovation 1998;18:1-11. https://doi.org/10.1016/

entrepreneurship: University spinoffs and wealth creation. Edward Elgar

S0166-4972(97)00101-6.

[36] Shane SA. Academic

Publishing; 2004.

2009;18:243-58. https://doi.org/10.3401/

*DOI: http://dx.doi.org/10.5772/intechopen.93919*

Small Bus Econ 2015;44:905-24. https:// doi.org/10.1007/s11187-014-9617-x.

[21] Palacín-Sánchez M-J, Di Pietro F. The role of the regional financial sector in the capital structure of small and medium-sized enterprises (SMEs). Reg Stud 2016;50:1232-47. https://doi.org/10.

1080/00343404.2014.1000290.

[22] Utrero-González N. Banking regulation, institutional framework and capital structure: International evidence from industry data. Q Rev Econ Financ 2007;47:481-506. https:// doi.org/10.1016/j.qref.2006.02.006.

[23] González VM, González F. Influence of bank concentration and institutions on capital structure: New international evidence. J Corp Financ 2008;14:363-

75. https://doi.org/10.1016/j. jcorpfin.2008.03.010.

[25] Black SE, Strahan PE. Entrepreneurship and bank credit availability. J Finance 2002;57:2807-33. https://doi. org/10.1111/1540-6261.00513.

[26] Evans DS, Jovanovic B. An estimated model of entrepreneurial choice under liquidity constraints. J Polit Econ 1989;97:808-27. https://doi.

[27] Deloof M, La Rocca M, Vanacker T. Local Banking Development and the Use of Debt Financing by Start-ups (Summary). Front Entrep Res 2016;36:6.

[28] Berger AN, Udell GF. The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. J Bank Financ 1998;22:613-73. https://doi.org/10.1016/

org/10.1086/261629.

S0378-4266(98)00038-7.

1996;111:639-70.

[24] Jayaratne J, Strahan PE. The finance-growth nexus: Evidence from bank branch deregulation. Q J Econ

*Does Financial Institution Proximity Affect the Development of Entrepreneurship? DOI: http://dx.doi.org/10.5772/intechopen.93919*

Small Bus Econ 2015;44:905-24. https:// doi.org/10.1007/s11187-014-9617-x.

[21] Palacín-Sánchez M-J, Di Pietro F. The role of the regional financial sector in the capital structure of small and medium-sized enterprises (SMEs). Reg Stud 2016;50:1232-47. https://doi.org/10. 1080/00343404.2014.1000290.

[22] Utrero-González N. Banking regulation, institutional framework and capital structure: International evidence from industry data. Q Rev Econ Financ 2007;47:481-506. https:// doi.org/10.1016/j.qref.2006.02.006.

[23] González VM, González F. Influence of bank concentration and institutions on capital structure: New international evidence. J Corp Financ 2008;14:363- 75. https://doi.org/10.1016/j. jcorpfin.2008.03.010.

[24] Jayaratne J, Strahan PE. The finance-growth nexus: Evidence from bank branch deregulation. Q J Econ 1996;111:639-70.

[25] Black SE, Strahan PE. Entrepreneurship and bank credit availability. J Finance 2002;57:2807-33. https://doi. org/10.1111/1540-6261.00513.

[26] Evans DS, Jovanovic B. An estimated model of entrepreneurial choice under liquidity constraints. J Polit Econ 1989;97:808-27. https://doi. org/10.1086/261629.

[27] Deloof M, La Rocca M, Vanacker T. Local Banking Development and the Use of Debt Financing by Start-ups (Summary). Front Entrep Res 2016;36:6.

[28] Berger AN, Udell GF. The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. J Bank Financ 1998;22:613-73. https://doi.org/10.1016/ S0378-4266(98)00038-7.

[29] Chiesa V, Piccaluga A. Exploitation and diffusion of public research: the case of academic spin-off companies in Italy. R&D Manag 2000;30:329-40. https://doi. org/10.1111/1467-9310.00187.

[30] Czarnitzki D, Rammer C, Toole AA. University spin-offs and the "performance premium." Small Bus Econ 2014;43:309-26. https://doi. org/10.1007/s11187-013-9538-0.

[31] Bellini N, Ferrucci L. Ricerca universitaria e processi di innovazione: le piccole e medie imprese nel Progetto Link. vol. 188. FrancoAngeli; 2002.

[32] Pleschak F. Entwicklungstendenzen des Technologietransfers und Anforderungen an seine Ausgestaltung., In: Pleschak F (ed) Technologietransfer, Anforderungen und Entwicklungstendenzen, Karlsruhe; 2003, p. 1-16.

[33] Atasu A, Van Wassenhove LN, Sarvary M. Efficient take-back legislation. Prod Oper Manag 2009;18:243-58. https://doi.org/10.3401/ poms.1080.01004.

[34] Palumbo R. Dall'Università al mercato. Governance e performance degli spinoff universitari in Italia: Governance e performance degli spinoff universitari in Italia. FrancoAngeli; 2010.

[35] Carayannis EG, Rogers EM, Kurihara K, Allbritton MM. Hightechnology spin-offs from government R&D laboratories and research universities. Technovation 1998;18:1-11. https://doi.org/10.1016/ S0166-4972(97)00101-6.

[36] Shane SA. Academic entrepreneurship: University spinoffs and wealth creation. Edward Elgar Publishing; 2004.

**140**

*Entrepreneurship - Contemporary Issues*

LLEE Luiss; 2014.

**References**

org/10.2307/2118406.

The World Bank; 1999.

[1] Manzocchi S, Quintieri B, Santoni G. Internal vs. external firm productivity drivers. A study of the Italian counties.

[11] Forestieri G, Mottura P. Il sistema

[12] Schumpeter AJ. A Theory of Economic Development. Cambridge, MA, Harvard University Press.; 1911.

[13] Lucas Jr RE. On the mechanics of economic development. J Monet Econ 1988;22:3-42. https://doi. org/10.1016/0304-3932(88)90168-7.

[14] Levine R, Zervos S. Stock markets, banks, and economic growth. Am Econ

[15] Rajan R, Zingales L. Financial development and growth. Am Econ Rev

[16] Demirgüç-Kunt A, Maksimovic V. Law, finance, and firm growth. J Finance 1998;53:2107-37. https://doi. org/10.1111/0022-1082.00084.

[17] Rajan RG, Zingales L. Financial systems, industrial structure, and growth. Oxford Rev Econ Policy 2001;17:467-82. https://doi.org/10.1093/

[18] Demirgüç-Kunt A, Levine R. Bank-based and market-based financial systems: Cross-country comparisons. In: (A. Demirgüç-Kunt and R. Levine E., editor., in Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development, MIT Press, Cambridge,

[19] Petersen MA, Rajan RG. Does distance still matter? The information revolution in small business lending. J Finance 2002;57:2533-70. https://doi. org/10.1111/1540-6261.00505.

[20] Deloof M, La Rocca M. Local financial development and the trade credit policy of Italian SMEs.

finanziario. Egea; 2013.

Rev 1998:537-58.

1998;88:559-86.

oxrep/17.4.467.

MA.; 2001.

[2] King RG, Levine R. Finance and growth: Schumpeter might be right. Q J Econ 1993;108:717-37. https://doi.

[3] Rajan RG, Zingales L. Banks and Markets: the Changing Character of European Finance. vol. Working Pa. 2003. https://doi.org/10.3386/w9595.

[4] Levine R. Financial development and economic growth: views and agenda.

[5] Guiso L, Sapienza P, Zingales L. Does local financial development matter? Q J Econ 2004;119:929-69. https://doi. org/10.1162/0033553041502162.

[6] Love I. Financial development and financing constraints: International evidence from the structural investment model. Rev Financ Stud 2003;16:765-91. https://doi.org/10.1093/rfs/hhg013.

[7] Di Patti EB, Dell'Ariccia G. Bank competition and firm creation. International Monetary Fund; 2001.

[8] Iacobucci D, Micozzi A. How to evaluate the impact of academic spinoffs on local development: an empirical analysis of the Italian case. J Technol Transf 2015;40:434-52. https://doi. org/10.1007/s10961-014-9357-8.

[9] Fini R, Grimaldi R, Sobrero M. Factors fostering academics to start up new ventures: an assessment of Italian founders' incentives. J Technol Transf 2009;34:380-402. https://doi. org/10.1007/s10961-008-9093-z.

[10] Allen F, Gale D. Comparing financial systems. MIT press; 2000. [37] Bellini E, Capaldo G, Edström A, Kaulio M, Raffa M, Ricciardi M ZG. The role of academic spin-offs in connecting technological local assets in regional contexts: A comparative analysis of Italian and Swedish cases., In 44th ICSB Conference; 1999.

[38] Smilor R, Matthews J. University venturing: technology transfer and commercialisation in higher education. Int J Technol Transf Commer 2004;3:111-28. https://doi.org/10.1504/ IJTTC.2004.003519.

[39] Christopoulos DK, Tsionas EG. Financial development and economic growth: evidence from panel unit root and cointegration tests. J Dev Econ 2004;73:55-74. https://doi.org/10.1016/j. jdeveco.2003.03.002.

[40] Ortìn P, Salas V, Trujillo M, Vendrell F. El Spin-off Universitario en España como modelo de creación de empresas intensivas en tecnología. 2007.

[41] Patzelt, H Shepherd D. Strategic entrepreneurship at universities: Academic entrepreneurs' assessment of policy programs. Entrep Theory Pract 2009;33:319-40. https://doi. org/10.1111/j.1540-6520.2008.00291.x.

[42] Fini R, Grimaldi R, Santoni S, Sobrero M. Complements or substitutes? The role of universities and local context in supporting the creation of academic spin-offs. Res Policy 2011;40:1113-27.

[43] Agarwal R, Bayus BL. The market evolution and sales takeoff of product innovations. Manage Sci 2002;48: 1024-41. https://doi.org/10.1287/ mnsc.48.8.1024.167.

[44] Rasmussen E. Understanding academic entrepreneurship: Exploring the emergence of university spin-off ventures using process theories. Int Small Bus J 2011;29:448-71. https://doi. org/10.1177/0266242610385395.

[45] Vohora A, Wright M, Lockett A. Critical junctures in the development of university high-tech spinout companies. Res Policy 2004;33:147-75. https://doi. org/10.1016/S0048-7333(03)00107-0.

**Chapter 9**

**Abstract**

mini-bonds

**143**

**1. Introduction**

Financial Fragility and Corporate

The chapter analyzes the financial policy of corporate bond issuers in the new Italian junior bond market specifically dedicated to unlisted firms and SMEs, using a proprietary firm-level dataset on 127 first-time mini-bond issuers across 2013– 2017 years jointly with a control sample of around 5200 Italian private firms that have not issued corporate bonds across the same years. Since SME access to the debt capital market is largely considered a valuable source of debt funding diversification, especially for growth firms with a prominent exposure on bank debt, we test using OLS regressions whether bond issuers are able to reduce their financial vulnerability in comparison with similar nonissuers firms. The aim is to assess the extent to which the financial choices of SMEs regarding nonequity external funding can become a key factor in facing real and financial shocks like those triggered by the current pandemic Covid-19 outbreak. Our findings suggest that the access to the junior bond market is beneficial for the Italian unlisted companies in terms of a

Bond Funding of SMEs: An

Analysis of the Italian Case

pronounced improvement in our financial fragility indicators.

**JEL classification:** G12, G23, G24, G32

to their higher perceived financial vulnerability.

**Keywords:** small business finance, bond financing, SMEs, financial fragility,

The pandemic Covid-19 outbreak has severely disrupted the economic systems across European countries during the 2020 first semester. Widespread lockdowns have brought to a halt for a few months the firms' production and services delivering in many countries and major concerns have arisen on the capacity of many firms to survive the real and financial shocks induced by the current pandemic. Despite all governments and public authorities vast subsidizing programs deployed to help economy recovery, still small and medium sized enterprises (SMEs) remain particularly exposed to the negative consequences of the current Covid-19 outbreak due

Among European countries, Italy has been the first country to be harshly hit by the coronavirus outbreak and one of the more exposed to negative economic consequences of the pandemic. Moreover, its economic system is very much reliant on SMEs on the economy supply side. Anecdotal evidence points out that many small

*Emanuele Rossi and Simone Boccaletti*

[46] Vanaelst I, Clarysse B, Wright M, Lockett A, Moray N, S'Jegers R. Entrepreneurial team development in academic spinouts: An examination of team heterogeneity. Entrep Theory Pract 2006;30:249-71. https://doi. org/10.1111/j.1540-6520.2006.00120.x.

[47] Clarysse B, Moray N. A process study of entrepreneurial team formation: The case of a researchbased spin-off. J Bus Ventur 2004;19:55-79. https://doi.org/10.1016/ S0883-9026(02)00113-1.

[48] La Rocca M, La Rocca T, Fasano F, Vecellio P. Does local financial development affect the survival of RSO?, University of Calabria, Working Paper. 2020.

[49] Sharma S. Financial development and innovation in small firms. The World Bank; 2007.

[50] Ayyagari M, Beck T, Demirgüç-Kunt A. Small and medium enterprises across the globe. Small Bus Econ 2007;29:415-34. https://doi.org/10.1007/ s11187-006-9002-5.

#### **Chapter 9**

*Entrepreneurship - Contemporary Issues*

Conference; 1999.

IJTTC.2004.003519.

jdeveco.2003.03.002.

[37] Bellini E, Capaldo G, Edström A, Kaulio M, Raffa M, Ricciardi M ZG. The role of academic spin-offs in connecting technological local assets in regional contexts: A comparative analysis of Italian and Swedish cases., In 44th ICSB

[45] Vohora A, Wright M, Lockett A. Critical junctures in the development of university high-tech spinout companies. Res Policy 2004;33:147-75. https://doi. org/10.1016/S0048-7333(03)00107-0.

[47] Clarysse B, Moray N. A process study of entrepreneurial team formation: The case of a researchbased spin-off. J Bus Ventur

2004;19:55-79. https://doi.org/10.1016/

[48] La Rocca M, La Rocca T, Fasano F,

[49] Sharma S. Financial development and innovation in small firms. The

[50] Ayyagari M, Beck T, Demirgüç-Kunt A. Small and medium enterprises across the globe. Small Bus Econ 2007;29:415-34. https://doi.org/10.1007/

Vecellio P. Does local financial development affect the survival of RSO?, University of Calabria, Working

S0883-9026(02)00113-1.

Paper. 2020.

World Bank; 2007.

s11187-006-9002-5.

[46] Vanaelst I, Clarysse B, Wright M, Lockett A, Moray N, S'Jegers R. Entrepreneurial team development in academic spinouts: An examination of team heterogeneity. Entrep Theory Pract 2006;30:249-71. https://doi. org/10.1111/j.1540-6520.2006.00120.x.

[38] Smilor R, Matthews J. University venturing: technology transfer and commercialisation in higher education.

2004;3:111-28. https://doi.org/10.1504/

[39] Christopoulos DK, Tsionas EG. Financial development and economic growth: evidence from panel unit root and cointegration tests. J Dev Econ 2004;73:55-74. https://doi.org/10.1016/j.

[40] Ortìn P, Salas V, Trujillo M, Vendrell F. El Spin-off Universitario en España como modelo de creación de empresas intensivas en tecnología. 2007.

[41] Patzelt, H Shepherd D. Strategic entrepreneurship at universities: Academic entrepreneurs' assessment of policy programs. Entrep Theory Pract 2009;33:319-40. https://doi. org/10.1111/j.1540-6520.2008.00291.x.

[42] Fini R, Grimaldi R, Santoni S, Sobrero M. Complements or substitutes? The role of universities and local context in supporting the creation of academic spin-offs. Res Policy 2011;40:1113-27.

[43] Agarwal R, Bayus BL. The market evolution and sales takeoff of product innovations. Manage Sci 2002;48: 1024-41. https://doi.org/10.1287/

[44] Rasmussen E. Understanding academic entrepreneurship: Exploring the emergence of university spin-off ventures using process theories. Int Small Bus J 2011;29:448-71. https://doi.

org/10.1177/0266242610385395.

mnsc.48.8.1024.167.

Int J Technol Transf Commer

**142**

## Financial Fragility and Corporate Bond Funding of SMEs: An Analysis of the Italian Case

*Emanuele Rossi and Simone Boccaletti*

#### **Abstract**

The chapter analyzes the financial policy of corporate bond issuers in the new Italian junior bond market specifically dedicated to unlisted firms and SMEs, using a proprietary firm-level dataset on 127 first-time mini-bond issuers across 2013– 2017 years jointly with a control sample of around 5200 Italian private firms that have not issued corporate bonds across the same years. Since SME access to the debt capital market is largely considered a valuable source of debt funding diversification, especially for growth firms with a prominent exposure on bank debt, we test using OLS regressions whether bond issuers are able to reduce their financial vulnerability in comparison with similar nonissuers firms. The aim is to assess the extent to which the financial choices of SMEs regarding nonequity external funding can become a key factor in facing real and financial shocks like those triggered by the current pandemic Covid-19 outbreak. Our findings suggest that the access to the junior bond market is beneficial for the Italian unlisted companies in terms of a pronounced improvement in our financial fragility indicators.

**Keywords:** small business finance, bond financing, SMEs, financial fragility, mini-bonds **JEL classification:** G12, G23, G24, G32

#### **1. Introduction**

The pandemic Covid-19 outbreak has severely disrupted the economic systems across European countries during the 2020 first semester. Widespread lockdowns have brought to a halt for a few months the firms' production and services delivering in many countries and major concerns have arisen on the capacity of many firms to survive the real and financial shocks induced by the current pandemic. Despite all governments and public authorities vast subsidizing programs deployed to help economy recovery, still small and medium sized enterprises (SMEs) remain particularly exposed to the negative consequences of the current Covid-19 outbreak due to their higher perceived financial vulnerability.

Among European countries, Italy has been the first country to be harshly hit by the coronavirus outbreak and one of the more exposed to negative economic consequences of the pandemic. Moreover, its economic system is very much reliant on SMEs on the economy supply side. Anecdotal evidence points out that many small

businesses are struggling to re-open and resume their activities after the slow easing up of the government lockdown measures.

**2. The financial fragility of SMEs: does corporate bond financing make**

*Financial Fragility and Corporate Bond Funding of SMEs: An Analysis of the Italian Case*

In our research setting, we are interested in testing one of the key ingredients that normally shapes the firms' financial policy [11, 12]: how firms' external funding choices could make them less financial fragile when facing potential unforeseen real or financial shocks like those induced by the current coronavirus pandemic. The basic idea, here, is the more the firm is less dependent from a unique or very few sources of external funding (for instance, bank lending), the better for the firm from a financial vulnerability point of view. We reckon that this topic is nowadays extremely important in particular for SMEs, which are the firm size-class clearly more at risk of survival in the current economic climate at least in those countries

In order to tackle this issue we ask ourselves whether the choice of debt diversification away from bank lending can improve or not the firms' financial fragility and, thus makes them, at least on paper, more resilient to potential external finan-

Ideally, to develop a comprehensive study on this research topic we should need a large dataset across years of firms' financial data around the crisis (in this case the pandemic) both before and after the event. Since we can only source data before the coronavirus outbreak, we are obliged to use firm-level data in the years before the 2020 pandemic crisis. We, thus, consider the firm's choice of corporate bond funding as the major external debt diversification solution molding the firm financial policy. Under these circumstances, we formulate the following main research question. Does corporate bond financing make SMEs more resilient to potential crisis? To answer this research question we opt to create a firm-level financial fragility indicator using core financial reports data both before and after the time of mini-bonds funding for issuer firms and compute the variation reported by this indicator across the years. The basic idea is that the difference between ex-post (after the bond issuance) score and the ex-ante score (before the mini-bond funding) of our financial fragility indicator should give us a good proxy of the impact of the treatment (the corporate bond funding) on the firm financial fragility and, thus, on the ability of the firms' financial policy to reach its desired outcome in terms of improved

Even if financial vulnerability can be measured along many dimensions, and there is not always a wide consensus on how measure it, we are confident that our

Prior literature on SME access to debt capital market have focused on the benefits that corporate bonds offers in terms of: positive management culture change linked to the firm financial life-cycle when approaching market-based finance [13]; enhanced market visibility on prospective investors [14–17]; acclimatization function and progressive step toward other more complex forms (even equity) of capital market funding [18]; and, even, reduced financial costs on subsequent bank lending thanks to heightened bargaining power in the firm-bank relationships [19]. On the contrary, there is still less evidence on the role that corporate bond financing may play on addressing the SMEs financial fragility issue. It is true that, at least on paper, any opportunity of debt diversification may help small businesses achieve a better and more balanced financial policy, but it is important also to verify whether this goal is somehow supported by the empirical data as we cannot take for granted that smaller firms are in practice able to improve their financial resilience through this channel of funding since there can be the suspicion that firms are replacing one form of debt (bank lending) with another one (debt securities). This is a quite relevant question in the current economic climate domi-

**SMEs more resilient to potential crisis?**

*DOI: http://dx.doi.org/10.5772/intechopen.93701*

most affected by the pandemic.

nated by the pandemic crisis.

(less) financial fragility.

**145**

cial shocks or crises.

Under these circumstances, the present study aims to test the financial policies that Italian SMEs have developed across the years starting from the aftermath of the 2008 financial crisis and the ensuing 2011 Greek sovereign debt crisis, up to recent years. There are many ways to deal with this issue and its many specifics. We opt to focus on how SMEs in Italy have chosen to diversify their debt funding away from bank lending through corporate bonds funding, since SME access to the debt capital market is largely considered a valuable source of debt funding diversification, especially for growth firms with a prominent exposure on bank debt [1–5]. Beyond that, one of the main goals of a firm's sound financial policy, particularly in the case of SMEs, should be to devise financial choices that may help reducing the financial vulnerability to potential unexpected financial shocks [6, 7].

There are several reasons for our research focus. First, it is well documented that SMEs tend to be over-reliant on bank debt, especially short-term lending [8]. Second, the last global financial crisis heightened in southern European countries by the spillover of Greek sovereign debt crisis in 2011 has produced a lasting credit crunch propelled by risk aversion from banks and their concerns on borrowers default risk, which it has been particularly severe for SMEs [9, 10]. Third, in order to counter the negative effect of this credit crunch on SMEs, the Italian government has promoted in June 2012 a raft of reforms in order to facilitate the SMEs and unlisted firms' access to bond financing<sup>1</sup> [3]. A new junior bond market for minibonds, named *ExtraMot-Pro*, within the domestic *Borsa Italiana* stock exchange, has been launched in February 2013, with a set of soft requisites for SMEs issuers. In brief, the new junior bond market is characterized by minimal regulations and simplified admission requirements in comparison with those set up for the senior corporate bond market.

More in particular, we analyze in this chapter whether mini-bond issuers have improved their financial resilience thanks to this market-based financial choice across the years between the two major recent crises (i.e., the 2011 Greek sovereign crisis and the 2020 pandemic-induced crisis). By focusing on this topic, our study may contribute to shed new light on the emerging debate on how small businesses can recover from the current crisis triggered by the Covid-19 pandemic.

Our empirical analysis is performed using regression models based on a proprietary hand-collected dataset of 127 mini-bonds issued by nonfinancial firms across 2013–2017 years jointly with a sample of nearly 5200 Italian private firms that have not issued corporate bonds across the same years. The dataset combines evidence on mini-bonds issuers, collected from *Borsa Italiana* website and admission prospectuses, with detailed financial statements data from Bureau Van Dijk' Amadeus/Aida dataset.

The chapter is organized as follows. Section 2 discusses our research question and the testable hypothesis. Section 3 describes our dataset and provides sample description. Section 4 illustrates the research design and the empirical methodology. Section 5 sets out the empirical results and discusses the main implications of the study. Section 5 concludes the paper.

<sup>1</sup> The regulatory framework for mini-bonds in Italy has been established by "Decreto Sviluppo" (D.L. n. 83, June 22, 2012), "Decreto Sviluppo Bis" (D.L. n. 179, October 18, 2012), "Piano Destinazione Italia" (D.L. n. 145, December 23, 2013), "Decreto competitività" (D.L. n. 91, June 24, 2014). For further detail, see the Borsa Italiana website: https://www.borsaitaliana.it/prolink/extramotpro/ilcontestonormativo/ilc ontestonormativo.en.htm

#### **2. The financial fragility of SMEs: does corporate bond financing make SMEs more resilient to potential crisis?**

In our research setting, we are interested in testing one of the key ingredients that normally shapes the firms' financial policy [11, 12]: how firms' external funding choices could make them less financial fragile when facing potential unforeseen real or financial shocks like those induced by the current coronavirus pandemic. The basic idea, here, is the more the firm is less dependent from a unique or very few sources of external funding (for instance, bank lending), the better for the firm from a financial vulnerability point of view. We reckon that this topic is nowadays extremely important in particular for SMEs, which are the firm size-class clearly more at risk of survival in the current economic climate at least in those countries most affected by the pandemic.

In order to tackle this issue we ask ourselves whether the choice of debt diversification away from bank lending can improve or not the firms' financial fragility and, thus makes them, at least on paper, more resilient to potential external financial shocks or crises.

Prior literature on SME access to debt capital market have focused on the benefits that corporate bonds offers in terms of: positive management culture change linked to the firm financial life-cycle when approaching market-based finance [13]; enhanced market visibility on prospective investors [14–17]; acclimatization function and progressive step toward other more complex forms (even equity) of capital market funding [18]; and, even, reduced financial costs on subsequent bank lending thanks to heightened bargaining power in the firm-bank relationships [19]. On the contrary, there is still less evidence on the role that corporate bond financing may play on addressing the SMEs financial fragility issue. It is true that, at least on paper, any opportunity of debt diversification may help small businesses achieve a better and more balanced financial policy, but it is important also to verify whether this goal is somehow supported by the empirical data as we cannot take for granted that smaller firms are in practice able to improve their financial resilience through this channel of funding since there can be the suspicion that firms are replacing one form of debt (bank lending) with another one (debt securities). This is a quite relevant question in the current economic climate dominated by the pandemic crisis.

Ideally, to develop a comprehensive study on this research topic we should need a large dataset across years of firms' financial data around the crisis (in this case the pandemic) both before and after the event. Since we can only source data before the coronavirus outbreak, we are obliged to use firm-level data in the years before the 2020 pandemic crisis. We, thus, consider the firm's choice of corporate bond funding as the major external debt diversification solution molding the firm financial policy.

Under these circumstances, we formulate the following main research question. Does corporate bond financing make SMEs more resilient to potential crisis? To answer this research question we opt to create a firm-level financial fragility indicator using core financial reports data both before and after the time of mini-bonds funding for issuer firms and compute the variation reported by this indicator across the years. The basic idea is that the difference between ex-post (after the bond issuance) score and the ex-ante score (before the mini-bond funding) of our financial fragility indicator should give us a good proxy of the impact of the treatment (the corporate bond funding) on the firm financial fragility and, thus, on the ability of the firms' financial policy to reach its desired outcome in terms of improved (less) financial fragility.

Even if financial vulnerability can be measured along many dimensions, and there is not always a wide consensus on how measure it, we are confident that our

businesses are struggling to re-open and resume their activities after the slow easing

Under these circumstances, the present study aims to test the financial policies that Italian SMEs have developed across the years starting from the aftermath of the 2008 financial crisis and the ensuing 2011 Greek sovereign debt crisis, up to recent years. There are many ways to deal with this issue and its many specifics. We opt to focus on how SMEs in Italy have chosen to diversify their debt funding away from bank lending through corporate bonds funding, since SME access to the debt capital market is largely considered a valuable source of debt funding diversification, especially for growth firms with a prominent exposure on bank debt [1–5]. Beyond that, one of the main goals of a firm's sound financial policy, particularly in the case of SMEs, should be to devise financial choices that may help reducing the financial

There are several reasons for our research focus. First, it is well documented that

More in particular, we analyze in this chapter whether mini-bond issuers have improved their financial resilience thanks to this market-based financial choice across the years between the two major recent crises (i.e., the 2011 Greek sovereign crisis and the 2020 pandemic-induced crisis). By focusing on this topic, our study may contribute to shed new light on the emerging debate on how small businesses

Our empirical analysis is performed using regression models based on a proprietary hand-collected dataset of 127 mini-bonds issued by nonfinancial firms across 2013–2017 years jointly with a sample of nearly 5200 Italian private firms that have not issued corporate bonds across the same years. The dataset combines evidence on mini-bonds issuers, collected from *Borsa Italiana* website and admission prospectuses, with detailed financial statements data from Bureau Van Dijk' Amadeus/Aida

The chapter is organized as follows. Section 2 discusses our research question and the testable hypothesis. Section 3 describes our dataset and provides sample description. Section 4 illustrates the research design and the empirical methodology. Section 5 sets out the empirical results and discusses the main implications of the

<sup>1</sup> The regulatory framework for mini-bonds in Italy has been established by "Decreto Sviluppo" (D.L. n. 83, June 22, 2012), "Decreto Sviluppo Bis" (D.L. n. 179, October 18, 2012), "Piano Destinazione Italia" (D.L. n. 145, December 23, 2013), "Decreto competitività" (D.L. n. 91, June 24, 2014). For further detail, see the Borsa Italiana website: https://www.borsaitaliana.it/prolink/extramotpro/ilcontestonormativo/ilc

can recover from the current crisis triggered by the Covid-19 pandemic.

SMEs tend to be over-reliant on bank debt, especially short-term lending [8]. Second, the last global financial crisis heightened in southern European countries by the spillover of Greek sovereign debt crisis in 2011 has produced a lasting credit crunch propelled by risk aversion from banks and their concerns on borrowers default risk, which it has been particularly severe for SMEs [9, 10]. Third, in order to counter the negative effect of this credit crunch on SMEs, the Italian government has promoted in June 2012 a raft of reforms in order to facilitate the SMEs and unlisted firms' access to bond financing<sup>1</sup> [3]. A new junior bond market for minibonds, named *ExtraMot-Pro*, within the domestic *Borsa Italiana* stock exchange, has been launched in February 2013, with a set of soft requisites for SMEs issuers. In brief, the new junior bond market is characterized by minimal regulations and simplified admission requirements in comparison with those set up for the senior

up of the government lockdown measures.

*Entrepreneurship - Contemporary Issues*

corporate bond market.

study. Section 5 concludes the paper.

ontestonormativo.en.htm

**144**

dataset.

vulnerability to potential unexpected financial shocks [6, 7].

metric that include five different financial ratios commonly used by scholars and practitioners in assessing firms' financial health is reasonable robust. We then use this indicator as our dependent variable in our regressions as depicted later in our Section 4. Among the explanatory variables, together with other control variables, we employ a mini-bond financing dummy which is equal to one in case of SME funding through this channel and zero otherwise.

corporate bonds offerings. From this large dataset, we randomly draw 1200

*Financial Fragility and Corporate Bond Funding of SMEs: An Analysis of the Italian Case*

firms (127 issuers and 5192 from the control group).

*DOI: http://dx.doi.org/10.5772/intechopen.93701*

**3.2 Sample descriptive characteristics**

**Table 1.**

**147**

*Issuers distribution by size class.*

nonissuing firms' observation, with a comparable size of the issuers' firms, for each year of mini-bond issuance (from 2013 up to 2017). In this way, we are able to match issuers in a given year with a control group randomly drawn for the same year. Hence, the final raw control group is composed by 6000 firms. However, due to lack of some relevant accounting information, our final sample consists of 5319

For what concerns firm-level accounting data for constructing our dependent and independent variables, we collect for the two firms'samples not only ex-ante data, (i.e. before the time of bond funding for issuers and the same year for the matched control group) but also data of 2 years after. For example, for mini-bond issuers that first-time entered the debt capital market during the 2017, we have collected financial statements data for the years 2016 and 2019. For a firm in the control group, the procedure is the same: if the firm is drawn in the 2017 subsample, we collected data for the years 2016 and 2019. In this way, we have homogeneous data between the issuers sample and the control group.

Our corporate bond issuers sample, which is composed by 127 offerings, is depicted in **Table 1** which illustrates the distribution of issuers by size (in terms of sales) using the firms' financial reports from the most recent year prior to the issuance date. In accordance with the standard EU Commission definition, we define a SME as a firm with fewer than 250 employees, total assets lower than €43 million, or sales lower than €50 million. A small firm is defined as a firm with fewer than 50 employees, total assets lower than €10 million, or sales lower than €10 million.

**Table 1** distribution highlights that SMEs cover around 49% of our sample (i.e. first two size classes). **Table 2** shows the distributions of issuer firms by industry. The majority of these bonds were issued by manufacturing firms, followed by the retail sector. The positive correlation between issuers'size and mini-bond capital raised is confirmed in **Table 3**. As a matter of fact, larger bonds are issued by unlisted firms with more than 50 €/million sales. For SMEs with sales under the 50 €/million threshold, the average capital raised remains quite low. **Table 4** displays the issuance motivations as declared in the bonds prospectuses, and highlights that the main use of proceeds of the mini-bond funding is to exploit growth opportunities but still debt restructuring and diversification of funding are acknowledged by a high percentage (around 23%) of issuers, behind supporting firms' growth target. **Table 5** divides our sample into four groups according to the issuer-size in order to

**Size class # of observation frequency** <10 million 12 9.45% Between 10 and 50 million 50 39.37% Between 50 and 100 million 18 14.17% >100 million 47 37.01% Total 127 100.00% *The sample is split accordingly to four different size classes based on sales in €/million. The table shows the number of the observations and the percentage with respect to the total for each category. Our elaboration on proprietary dataset.*

In this way, we can empirically test our main hypothesis on whether Italian SMEs mini-bond issuers are able to reduce ex-post their financial vulnerability as a consequence of this debt diversification choice in comparison with similar and comparable nonissuer firms. In sum our hypothesis is the following:

*H.: Italian SME mini-bond issuers that diversify their debt funding through the access to the debt capital-market become ex-post less financial fragile.*

If the above hypothesis is positively confirmed by our tests, we can claim that corporate bond funding may prove to be a key ingredient of a firm's sound financial policy aiming to improve its financial resilience to potential unexpected financial shocks, particularly in the case of SMEs.

#### **3. Dataset and sample description**

#### **3.1 Dataset on Italian companies**

Since we cannot test the counterfactual assumption of our hypothesis, i.e. what could happen to the financial vulnerability of those issuers firms if they have not chosen to access the debt capital market, we have to rely on a matched control group of private firms that have not issued corporate bonds across the same years under investigation. This control group is created from a large sample of around 6000 Italian firms extracted from Bureau Van Dijk' Amadeus/Aida dataset (hereafter Amadeus).

Therefore, in order to analyze the role of corporate bond funding in changing SMEs financial fragility, we have sourced data for two different samples. First, the listed mini-bonds sample (i.e. issuers firms) and, second, the matched control group sample formed by comparable private firms that have not issued mini-bonds (nonissuers firms).

For the first sample, we source data on mini-bonds listed on the junior bond market ExtraMot Pro, from its starting date in 2013 up to the end of December 2017. We obtained from the *Borsa Italiana* website the raw information on listed bonds and its issuers on the 15th January 2020. The total number of bonds net of delisting is 241, from 160 different firms. We consider only first time issuers, so we eliminate subsequent bond offerings from the same firm, since the decision to access the capital market could be persistent across time, following the standard approach used in the going public literature, dating back to the seminal work of Pagano et al. [20]. Then, we match the obtained dataset with accounting information about the issuers, collected from the Amadeus database. Due to a lack of complete accounting information for some issuers, the dataset comprises 127 minibonds issued by nonfinancial companies*.* We consider only nonfinancial firm issuers because financial statements information for financial and nonfinancial companies are not easily comparable.

As regards our control group, we source from the same Amadeus database a subset of nearly 40,000 private Italian nonfinancial firms with a number of employees between 1 and 2000 units, total asset between 0.3 and 1500 €/million, and with at least 5 years of available accounting data across the years where we have

#### *Financial Fragility and Corporate Bond Funding of SMEs: An Analysis of the Italian Case DOI: http://dx.doi.org/10.5772/intechopen.93701*

corporate bonds offerings. From this large dataset, we randomly draw 1200 nonissuing firms' observation, with a comparable size of the issuers' firms, for each year of mini-bond issuance (from 2013 up to 2017). In this way, we are able to match issuers in a given year with a control group randomly drawn for the same year. Hence, the final raw control group is composed by 6000 firms. However, due to lack of some relevant accounting information, our final sample consists of 5319 firms (127 issuers and 5192 from the control group).

For what concerns firm-level accounting data for constructing our dependent and independent variables, we collect for the two firms'samples not only ex-ante data, (i.e. before the time of bond funding for issuers and the same year for the matched control group) but also data of 2 years after. For example, for mini-bond issuers that first-time entered the debt capital market during the 2017, we have collected financial statements data for the years 2016 and 2019. For a firm in the control group, the procedure is the same: if the firm is drawn in the 2017 subsample, we collected data for the years 2016 and 2019. In this way, we have homogeneous data between the issuers sample and the control group.

#### **3.2 Sample descriptive characteristics**

metric that include five different financial ratios commonly used by scholars and practitioners in assessing firms' financial health is reasonable robust. We then use this indicator as our dependent variable in our regressions as depicted later in our Section 4. Among the explanatory variables, together with other control variables, we employ a mini-bond financing dummy which is equal to one in case of SME

In this way, we can empirically test our main hypothesis on whether Italian SMEs mini-bond issuers are able to reduce ex-post their financial vulnerability as a consequence of this debt diversification choice in comparison with similar and

*H.: Italian SME mini-bond issuers that diversify their debt funding through the access*

If the above hypothesis is positively confirmed by our tests, we can claim that corporate bond funding may prove to be a key ingredient of a firm's sound financial policy aiming to improve its financial resilience to potential unexpected financial

Since we cannot test the counterfactual assumption of our hypothesis, i.e. what could happen to the financial vulnerability of those issuers firms if they have not chosen to access the debt capital market, we have to rely on a matched control group of private firms that have not issued corporate bonds across the same years under investigation. This control group is created from a large sample of around 6000 Italian firms extracted from Bureau Van Dijk' Amadeus/Aida dataset (here-

Therefore, in order to analyze the role of corporate bond funding in changing SMEs financial fragility, we have sourced data for two different samples. First, the listed mini-bonds sample (i.e. issuers firms) and, second, the matched control group sample formed by comparable private firms that have not issued mini-bonds

For the first sample, we source data on mini-bonds listed on the junior bond market ExtraMot Pro, from its starting date in 2013 up to the end of December 2017. We obtained from the *Borsa Italiana* website the raw information on listed bonds and its issuers on the 15th January 2020. The total number of bonds net of delisting is 241, from 160 different firms. We consider only first time issuers, so we eliminate subsequent bond offerings from the same firm, since the decision to access the capital market could be persistent across time, following the standard approach used in the going public literature, dating back to the seminal work of Pagano et al. [20]. Then, we match the obtained dataset with accounting information about the issuers, collected from the Amadeus database. Due to a lack of complete accounting information for some issuers, the dataset comprises 127 minibonds issued by nonfinancial companies*.* We consider only nonfinancial firm issuers because financial statements information for financial and nonfinancial

As regards our control group, we source from the same Amadeus database a subset of nearly 40,000 private Italian nonfinancial firms with a number of employees between 1 and 2000 units, total asset between 0.3 and 1500 €/million, and with at least 5 years of available accounting data across the years where we have

comparable nonissuer firms. In sum our hypothesis is the following:

*to the debt capital-market become ex-post less financial fragile.*

funding through this channel and zero otherwise.

*Entrepreneurship - Contemporary Issues*

shocks, particularly in the case of SMEs.

**3. Dataset and sample description**

**3.1 Dataset on Italian companies**

companies are not easily comparable.

after Amadeus).

(nonissuers firms).

**146**

Our corporate bond issuers sample, which is composed by 127 offerings, is depicted in **Table 1** which illustrates the distribution of issuers by size (in terms of sales) using the firms' financial reports from the most recent year prior to the issuance date. In accordance with the standard EU Commission definition, we define a SME as a firm with fewer than 250 employees, total assets lower than €43 million, or sales lower than €50 million. A small firm is defined as a firm with fewer than 50 employees, total assets lower than €10 million, or sales lower than €10 million.

**Table 1** distribution highlights that SMEs cover around 49% of our sample (i.e. first two size classes). **Table 2** shows the distributions of issuer firms by industry. The majority of these bonds were issued by manufacturing firms, followed by the retail sector. The positive correlation between issuers'size and mini-bond capital raised is confirmed in **Table 3**. As a matter of fact, larger bonds are issued by unlisted firms with more than 50 €/million sales. For SMEs with sales under the 50 €/million threshold, the average capital raised remains quite low. **Table 4** displays the issuance motivations as declared in the bonds prospectuses, and highlights that the main use of proceeds of the mini-bond funding is to exploit growth opportunities but still debt restructuring and diversification of funding are acknowledged by a high percentage (around 23%) of issuers, behind supporting firms' growth target. **Table 5** divides our sample into four groups according to the issuer-size in order to


*The sample is split accordingly to four different size classes based on sales in €/million. The table shows the number of the observations and the percentage with respect to the total for each category. Our elaboration on proprietary dataset.*

#### **Table 1.**

*Issuers distribution by size class.*


#### **Table 2.**

*Issuer distribution across sectors, using the ATECO 2007 classifications.*


*Principal capital raised, by issuers size class. The table depicts the average capital raised and the total volume of principal capital for the four issuers size classes. Values are displayed in €/million. Our elaboration on proprietary dataset.*

#### **Table 3.**

*Issues' volume (€/millions), by issuers' size classes.*

provide a more detailed examination of the issuers' characteristics through selected financial ratios. It is useful to highlight that smaller issuers are more leveraged, but, interestingly, have a higher interest coverage ratio (the ratio between EBITDA and interest expenses) and EBITDA over sales with respect to larger firms, while asset tangibility (as measured as tangible fixed asset over total assets) is, as expected, lower. Lastly, **Table 6** exhibits the differences in key financial ratios between the control group and minibond-issuers. The two samples present strong similarities in terms of size and profitability (i.e. ROI), which can guarantee us a good fit of our control group. On the other hand, issuers are overall more indebted, and in particular to banks. This evidence confirms that the use of mini-bond funding is aimed to exploit growth opportunities when bank lending is particularly costly and/or rationed, or to diversify the funding sources.

**4. Research design and methodology**

*Selected financial ratios by issuers' size class.*

*between tangible fixed assets and total assets. Our elaboration on proprietary dataset.*

In order to study whether the access to the mini-bond market reduces firms' financial fragility, we perform a set of OLS regression models using the pooled sample of issuers and nonissuers of mini-bonds across the years analyzed

**4.1 Empirical method**

**Table 5.**

**149**

*Category* **D/E**

**Table 4.** *Use of proceeds.*

> Between 10 and 50 million

Between 50 and 100 million

**Ratio**

*DOI: http://dx.doi.org/10.5772/intechopen.93701*

**Bank debt exposure**

**Interest coverage**

*the number of issuers due to the fact that some issuers have declared more than one use of proceeds.*

**Short-term bank debt ratio**

*4.73 29.28% 37.07 17.53% 0.42 10.16 34.92*% *27.51%*

2.53 50.39% 7.91 26.78% 1.22 8.13 14.56% 27.28%

*2.52 18.30% 13.20 13.50% 0.51 6.78 10.13*% *24.53%*

2.18 45.16% 6.06 26.58% 1.06 10.19 12.79% 20.33%

*1.4 15.06% 9.14 14.77% 0.17 8.81 9.40*% *19.75%*

*2.21 18.25% 4.70 15.86% 0.44 7.53 8.45*% *18.81%*

*2.58 19.47% 14.08 15.06% 0.44 7.64 13.90*% *22.11%*

<10 million 2.61 34.82% 17.85 16.85% 1.15 6.6 23.03% 21.00%

**Motivation # of observation Frequency** Support working capital 20 10.10% Growth 84 42.42% Exploit merge/acquisition opportunity 13 6.57% Internationalization 22 11.11% Debt restructuring/diversification of funding 45 22.73% Not declared/unavailable 14 7.07% Total 198 100% *Motivations declared by issuers in the bond prospectuses. This table shows the motivations reported in the bond prospectus, divided into 5 main categories: Supporting the working capital, growth, exploit M&A opportunity, internationalization, debt restructuring or diversification of funding. The number of declared use of proceeds exceeds*

*Financial Fragility and Corporate Bond Funding of SMEs: An Analysis of the Italian Case*

>100 million 1.58 43.49% 5.96 25.04% 1.17 8.77 12.36% 25.45%

*Total* 2.14 45.62% *7.71 25.16% 1.17 8.55* 14.30% 25.02%

*Issuers' descriptive statistics. The table reports selected financial ratios for issuers, divided into four size classes (in terms of sales). Means and standard deviations (in italics) are reported. D/E Ratio is the issuer's debt to equity ratio; Bank debt exposure is the ratio between the bank debt to total debt. The interest coverage ratio is the ratio between the issuer's EBITDA and its interest expenses. The short-term bank debt ratio is the ratio between bank short term debt and total debt. The current ratio is the ratio between issuer's current assets and current liabilities. Tangible asset ratio is the ratio*

**Current ratio**

**ROI** *EBITDA/ Sales*

*Tangible ratio*

#### *Financial Fragility and Corporate Bond Funding of SMEs: An Analysis of the Italian Case DOI: http://dx.doi.org/10.5772/intechopen.93701*


*Motivations declared by issuers in the bond prospectuses. This table shows the motivations reported in the bond prospectus, divided into 5 main categories: Supporting the working capital, growth, exploit M&A opportunity, internationalization, debt restructuring or diversification of funding. The number of declared use of proceeds exceeds the number of issuers due to the fact that some issuers have declared more than one use of proceeds.*

#### **Table 4.**

*Use of proceeds.*


*Issuers' descriptive statistics. The table reports selected financial ratios for issuers, divided into four size classes (in terms of sales). Means and standard deviations (in italics) are reported. D/E Ratio is the issuer's debt to equity ratio; Bank debt exposure is the ratio between the bank debt to total debt. The interest coverage ratio is the ratio between the issuer's EBITDA and its interest expenses. The short-term bank debt ratio is the ratio between bank short term debt and total debt. The current ratio is the ratio between issuer's current assets and current liabilities. Tangible asset ratio is the ratio between tangible fixed assets and total assets. Our elaboration on proprietary dataset.*

#### **Table 5.**

provide a more detailed examination of the issuers' characteristics through selected financial ratios. It is useful to highlight that smaller issuers are more leveraged, but, interestingly, have a higher interest coverage ratio (the ratio between EBITDA and interest expenses) and EBITDA over sales with respect to larger firms, while asset tangibility (as measured as tangible fixed asset over total assets) is, as expected, lower. Lastly, **Table 6** exhibits the differences in key financial ratios between the control group and minibond-issuers. The two samples present strong similarities in terms of size and profitability (i.e. ROI), which can guarantee us a good fit of our control group. On the other hand, issuers are overall more indebted, and in particular to banks. This evidence confirms that the use of mini-bond funding is aimed to exploit growth opportunities when bank lending is particularly costly and/or

**Size class Average issue Total volume Total volume (%)** <10 million 11.80 141.58 3.17% Between 10 and 50 million 6.17 308.33 6.90% Between 50 and 100 million 14.89 267.45 5.98% >100 million 79.88 3754.16 83.96% Total 35.21 4471.52 100% *Principal capital raised, by issuers size class. The table depicts the average capital raised and the total volume of principal capital for the four issuers size classes. Values are displayed in €/million. Our elaboration on proprietary*

**Sector # of observation Frequency** Accommodation and catering 2 1.57% Agriculture, silviculture and fishing 2 1.57% Arts, sports and entertainment 2 1.57% Buildings and constructions 7 5.51% Energy 5 3.94% Health and social care 2 1.57% ICT 7 5.51% Manufacturing 54 42.52% Professional and scientific activities 8 6.30% Real estate 2 1.57% Rental and travels 6 4.72% Retail activities 16 12.60% Transports and storing 3 2.36% Water, sewer and waste 11 8.66% *Total 127 100.00%*

*The number of firms and the frequencies are displayed. Our elaboration on proprietary dataset.*

*Issuer distribution across sectors, using the ATECO 2007 classifications.*

*Entrepreneurship - Contemporary Issues*

**Table 2.**

*dataset.*

**Table 3.**

**148**

rationed, or to diversify the funding sources.

*Issues' volume (€/millions), by issuers' size classes.*

*Selected financial ratios by issuers' size class.*

#### **4. Research design and methodology**

#### **4.1 Empirical method**

In order to study whether the access to the mini-bond market reduces firms' financial fragility, we perform a set of OLS regression models using the pooled sample of issuers and nonissuers of mini-bonds across the years analyzed


control variables about the issuers and nonissuers characteristics using the last available accounting information at the date of the bond offering. We control for

*Financial Fragility and Corporate Bond Funding of SMEs: An Analysis of the Italian Case*

As indicated previously, our dependent variable is the change in firms' financial fragility, and it portrays the exposure of the firms to the negative consequences to potential financial shocks. We build a measure of financial fragility (or vulnerability) using an equally weighted scoring indicator of five financial ratios that capture the most significant dimensions of firms' financial health. They are the following: interest coverage financial ratio; current ratio; short-term bank debt over total debt; financial leverage (i.e. debt to equity ratio), bank debt exposure (bank debt over total debt). The procedure is the ensuing: for each year and for each five financial ratio we create a ranking system starting from a score of 1 (lowest financial fragility) up to 5 (highest financial fragility) based on a quintile classification of the financial ratio (we used also different ranking criteria, but our empirical results remain robust and are not affected significantly). For example, for year 2016 we have a starting sample of 28 mini-bond issuers and 1200 firms in the control group. Then, for each financial ratio we compute the score for all firms. Then, we compute the financial fragility indicator for all firms by computing the average of all 5 scores (with equal

Next, we calculate the difference of the score of the financial fragility indicator between t + 2 and t 1, relative to the reference year. We think that a two-year time span after the event is a good compromise in order to assess the effect of the firms' financial policy choices on the desired outcomes in terms of better financial resilience. Longer event windows (up to 3 year after the event or more) have undesired features such as: the loss of a significant number of observations in our issuers sample since for mini-bond issued during 2017 we do not have a 3 year ex-post track record of financial reports; and the longer the time horizon the more the effects on our financial fragility indicator can be influenced by other factors than merely the financial policy choice under scrutiny. **Table 7** shows the differences in the average financial fragility indicator score for the two sub-samples. As a matter of fact, minibond issuers have a higher average score because they are more leveraged, more indebted to banks and have a lower interest coverage with respect to the control

**Variable Issuers Control sample Total** Before t0 3.91 3.2 3.21

After t0 3.73 3.12 3.14

Difference 0.18\*\*\* 0.07\*\*\* 0.07\*\*\*
