SMEs’ behavior under financial constraints: An empirical investigation on the legal environment and the substitution effect with tax arrears

Greta Falavigna and Roberto Ippoliti

The North American Journal of Economics and Finance, 2023, vol. 66, issue C

Abstract: Considering the Italian legal environment, this work aims to shed new light on the behavior of SMEs under financial constraints, investigating how the inefficiency of courts in enforcing credit rights can affect their corporate finance. On the one hand, our results confirm previous findings on the pecking order theory, supporting the hypothesis of substitution between financial debts and trade credits. On the other hand, based on our evidence, if SMEs are affected by judicial inefficiency, we can expect their access to both the capital market and trade credit to be limited by the uncertainty of the legal environment, causing them to use tax arrears to raise internal liquidity. Indeed, if the time needed to settle insolvency cases decreases by 20%, we can expect an increase in the financial debt ratio between 1.07% and 3.87% and in the trade credit ratio between 0.14% and 1.35%, while, focusing on tax arrears, we can expect a decrease in the tax debt ratio between 0.78% and 1.61%.

Keywords: Trade credits; Financial constraints; Tax arrears; Manufacturing industry; SMEs; Legal environment (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:66:y:2023:i:c:s1062940823000268

DOI: 10.1016/j.najef.2023.101903

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