Lunch seminar: “A critical analysis of the reform of the severance payments system in Italy: its effects on the cost of capital for SMEs and their access to bank credit”

by Riccardo Calcagno (Free University, Amsterdam and CeRP)

03 March 2006; h: 13:30

Fondazione Collegio Carlo Alberto – Moncalieri

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Presentation of the first results of a research on the effects of the reform of severance pay (TFR) on the Italian Small and Medium Enterprises.

Abstract of the research

We study the impact of the proposed reform of the system of severance payments currently in use for Italian employees on the cost and the access to credit for SMEs.

The capital structure of SMEs in Italy is characterized by high use of internal equities, public debt is very rare, outside equity negligible, which seems to suggest that some form of “pecking order” is valid  (Guiso (2002)). Moreover, the access to bank credit is extremely restricted for firms with very low level of assets, and the stock of the TFR accumulated into the balance sheet of SMEs accounts approximately for the 15% of assets. Using the model of Holmstrom and Tirole (1997), we predict that subsequent to the reform, which moves future flows of TFR outside the firm, the cost of bank debt for SMEs will reduce, as well as the total amount of capital lent to them, exacerbating then the credit constraints on some of the smallest firms. Further, we enrich the model considering commercial banks as specialized monitoring agents who can reduce moral hazard, and we verify that our main conclusion is robust to this generalization. We derive then some conclusions in terms of the impact of the reform on overall efficiency.

In order to estimate quantitatively the impact of the reform, we plan to perform some simulations, which make use of an estimated reaction function of Italian banks to a collateral squeeze. We briefly describe then the methodology we will be using.