Indirect Costs of Bankruptcy : Evidence from Italian SMEs

The aim of the paper is to measure indirect costs generated by financial distress, as a consequence of filing for a bankruptcy procedure, by implementing a model suitable for Italian small and medium size entities (SMEs).There are only few papers that provide evidence of the indirect costs of financial distress, but they often used variables appropriate for big corporations and/or listed companies, analyzing prevalently US companies. This paper provides empirical evidence to the field applying its scientific contribution to the SME's world, also shedding light on the Italian context, as a representative case of civil-law based countries.We analyzed financial statements and other available data concerning failed Italian SMEs, which went into bankruptcy in 2011, collecting the information from the official databases of the main Italian courts (Milan, Rome and Naples). We compared the results concerning failed firms with those regarding a control sample of non-failed firms. We used the AIDA Italian database, which includes financial statements of all limited liability and stock corporation Italian companies. The analysis covers five years prior to the bankruptcy, in order to highlight the trends of some financial ratios.The results are partially consistent with some previous literature, according to which firms in financial distress suffer damages due to connected indirect costs even before bankruptcy