Early stage SME bankruptcy: does the local banking market matter?

  • Giuseppe Arcuri
  • Nadine Levratto


This paper investigates the role of local context, with regard to the effect of local financial development and banking concentration, on a firm’s probability of bankruptcy at the post-creation stage. Our empirical setting is based on the logit multilevel model that better allows the treatment of data referring to different levels of aggregation (firm and local variables) applied to companies located in Italy. We find that a higher level of financial development in a province decreases the likelihood of corporate bankruptcy. This result is robust considering a 2SLS regression in which we use instruments for the local financial development and for the concentration of bank branches. In addition, our estimations suggest that the effect of local financial development and bank concentration is shaped by size. Local financial development is particularly significant for small firms, which traditionally suffer from great difficulty in accessing credit, whereas local banking concentration reduces the probability of bankruptcy for medium-sized firms.


Probability of bankruptcy SMEs Multilevel model Local banking structure 

JEL codes

C26 C30 M13 R11 L26 



We are very thankful to Maurizio La Rocca who provided expertise that greatly assisted the research. We are also grateful to two anonymous referee of the research center EconomiX for their suggestions. We are grateful to Marcus Dejardin, Claudia Ghisetti and all the participants of the KID 2017 Thematic School InSHS CNRS for their precious comments on an earlier version of his paper.


  1. Albertazzi U, Marchetti DJ (2010) Credit supply, flight to quality and evergreening: an analysis of bank-firm relationships after Lehman. Working Paper Bank of Italy, Economic Research and International Relations, Serie Temi di discussione, n° 756.Google Scholar
  2. Alessandrini, P., & Zazzaro, A. (1999). A “possibilist” approach to local financial systems and regional development: the Italian experience. In R. Martin (Ed.), Money and the space economy (pp. 71–92). New York: Wiley.Google Scholar
  3. Altman, E. I. (1968). Financial ratios, discriminant analysis & the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–609.CrossRefGoogle Scholar
  4. Andriani, L. (2013). Is acting prosocially beneficial for the credit market? Review of Social Economy, 72(3), 354–378.CrossRefGoogle Scholar
  5. Andriani L (2015) Institutional conformity and regional credit market failures: evidence from the Italian industrial districts. Working Papers in Management, Birkbeck, Department of Management, BWPMA 1503, November.Google Scholar
  6. Arnaudo D, Micucci G, Rigon M and Rossi P (2016) Should I stay or should I go? Firms’ mobility across banks in the aftermath of financial turmoil, Banca d’Italia Working Paper, n° 1086.Google Scholar
  7. Audretsch, D. B., & Dohse, D. (2007). Location: a neglected determinant of firm growth. Review of World Economics, 143(1), 79–107.CrossRefGoogle Scholar
  8. Bates, T. (1997). Financing small business creation: the case of Chinese and Korean immigrant entrepreneurs. Journal of Business Venturing, 12(2), 109–124.CrossRefGoogle Scholar
  9. Beck, T., Demirguc-Kunt, A., & Maksimovic, V. (2004). Financial and legal constraints to firm growth: Does firm size matter? Journal of Finance, 60(1), 137–177.CrossRefGoogle Scholar
  10. Berger, A. N., & Udell, G. F. (1998). The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle. Journal of Banking and Finance, 22(6–8), 613–673.CrossRefGoogle Scholar
  11. Black, S. E., & Strahan, P. E. (2002). Entrepreneurship and bank credit availability. The Journal of Finance, 57(6), 2807–2833.CrossRefGoogle Scholar
  12. Bonaccorsi di Patti, E. (2009). Weak institutions and credit availability: the impact of crime on bank loans (p. 52). Banca d’Italia: Questioni di economia e finanza-Occasional Papers.Google Scholar
  13. Bonaccorsi di Patti, E., & Gobbi, G. (2001). The changing structure of local credit markets: are small businesses special? Journal of Banking and Finance, 25(12), 2209–2237.CrossRefGoogle Scholar
  14. Bonnet, J., Cieply, S., & Dejardin, M. (2005). Financial constraints on new firms: looking for regional disparities. Brussels Economic Review, 48(3), 217–245.Google Scholar
  15. Bonnet J., & Le Pape N. (2012) Entrepreneurship motives, entrepreneurial orientation and duration of new French firms. In A. Rahim (Ed.), Social Intelligence, Leadership, and Problem Solving (pp. 93–106). Transaction Publishers. Available at:
  16. Buehler, S., Kaiser, C., & Jaeger, F. (2012). The geographic determinants of bankruptcy: evidence from Switzerland. Small Business Economics, 39(1), 231–251.CrossRefGoogle Scholar
  17. Cariola, A., La Rocca, M., & La Rocca, T. (2010). The influence of local institutional differences on the capital structure of SMEs: evidence from Italy. International Small Business Journal, 28(3), 234–257.CrossRefGoogle Scholar
  18. Cassar, G. (2004). The financing of business start-ups. Journal of Business Venturing, 19, 261–283.CrossRefGoogle Scholar
  19. Cestone, G., & White, L. (2003). Anticompetitive financial contracting: the design of financial claims. The Journal of Finance, 58(5), 2109–2141.CrossRefGoogle Scholar
  20. Cetorelli, N., & Strahan, P. E. (2006). Finance as a barrier to entry: bank competition and industry structure in local U.S. markets. Journal of Finance, American Finance Association, 61(1), 437–461.Google Scholar
  21. Dell'Ariccia, G., & Marquez, R. (2006). Lending booms and lending standards. Journal of Finance, 61(5), 2511–2546.CrossRefGoogle Scholar
  22. Deloof, M., & La Rocca, M. (2014). Local financial development and the trade credit policy of Italian SMEs. Small Business Economics, 44(4), 905–924.CrossRefGoogle Scholar
  23. Deloof M., La Rocca M., & Vanacker T. (2016) Local banking development and the use of debt financing by start-up firms. Working Paper University of Antwerp. Available at
  24. Fazzari, S. M., & Petersen, B. C. (1993). Working capital and fixed investment: new evidence on financing constraints. The Rand Journal of Economics, 24(3), 328–342.CrossRefGoogle Scholar
  25. Fisman, R., & Love, I. (2003). Trade credit, financial intermediary development, and industry growth. Journal of Finance, 58(1), 353–374.CrossRefGoogle Scholar
  26. Fotopoulos, G., & Louri, H. (2000). Location and survival of new entry. Small Business Economics, 14(4), 311–321.CrossRefGoogle Scholar
  27. Fort, T. C., Haltiwanger, J. C., Jarmin, R. S., & Miranda, J. (2013). How firms respond to business cycles: The role of firm age and firm size. IMF Economic Review, 61, 520–559.CrossRefGoogle Scholar
  28. Gagliardi, F. (2009). Financial development and the growth of cooperative firms. Small Business Economics, 32(4), 439–464.CrossRefGoogle Scholar
  29. Garsaa, A., & Levratto, N. (2016). Does the employment growth rate depend on the local context? An analysis of French establishments over the 2004-2010 period. Revue d'Economie Industrielle, 153(1), 47–89.Google Scholar
  30. Giovannini, A., Iacopetta, M., & Minetti, R. (2013). Financial markets, banks, and growth: disentangling the links. Revue de l'OFCE, 131(5), 105–147.CrossRefGoogle Scholar
  31. Glauben, T., Tietje, H., & Weiss, C. (2006). Agriculture on the move: exploring regional differences in farm exit rates in western Germany. Review of Regional Research, 26(1), 103–118.CrossRefGoogle Scholar
  32. Guiso, L., Sapienza, P., & Zingales, L. (2004). Does local financial development matter? Quarterly Journal of Economics, 119(3), 929–969.CrossRefGoogle Scholar
  33. Haltiwanger, J., Jarmin, R. S., & Miranda, J. (2013). Who creates jobs? Small versus large versus young. Review of Economics and Statistics, 95(2), 347–361.CrossRefGoogle Scholar
  34. Hanssens J., Deloof M., Vanacker T. (2015). Underexplored issues in entrepreneurial finance. In D.B. Audretch, C.S. Hayter, A.N. Link (Eds.), Concise guide to entrepreneurship, technology, and innovation pp. (219–223). Chetelham: Edward Elgar Publishing.Google Scholar
  35. Hurst, E., & Pugsley, B. W. (2011). What do small businesses do? Brookings Papers on Economic Activity, 2011(2), 73–118.CrossRefGoogle Scholar
  36. Kale, S., & Arditi, D. (1998). Business failures: liabilities of newness, adolescence, and smallness. Journal of Construction Engineering and Management, 124(6), 458–464.CrossRefGoogle Scholar
  37. Kendall, J. (2012). Local financial development and growth. Journal of Banking and Finance, 36(5), 1548–1562.CrossRefGoogle Scholar
  38. King, R. G., & Levine, R. (1993a). Financial intermediation and economic development. In C. Mayer & X. Vives (Eds.), Financial intermediation in the construction of Europe (pp. 156–189). London: Centre for Economic Policy Research.Google Scholar
  39. King, R. G., & Levine, R. (1993b). Finance, entrepreneurship and growth: theory and evidence. Journal of Monetary Economics, 32, 513–542.CrossRefGoogle Scholar
  40. King, R. G., & Levine, R. (1993c). Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics, 108(3), 717–737.CrossRefGoogle Scholar
  41. Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: causality and causes. Journal of Monetary Economics, 46, 31–77.CrossRefGoogle Scholar
  42. Miller S.M., Hoffer A., Wille D. (2016). Small-business financing after the financial crisis: lessons from the literature. Mercatus Working Paper, Mercatus Center at George Mason University, Arlington.Google Scholar
  43. Mueller, S., & Stegmaier, J. (2014). Economic failure and the role of plant age and size. Small Business Economics, 44(3), 621–638.CrossRefGoogle Scholar
  44. Ogane, Y. (2016). Banking relationship numbers and new business bankruptcies. Small Business Economics, 46(2), 169–185.CrossRefGoogle Scholar
  45. Petersen, M. A., & Rajan, R. G. (1995). The effect of credit market competition on lending relationships. Quarterly Journal of Economics, 110(2), 407–443.CrossRefGoogle Scholar
  46. Petersen, M. A., & Rajan, R. G. (2002). Does distance still matter? The information revolution in small business lending. The Journal of Finance, 57(6), 2533–2570.CrossRefGoogle Scholar
  47. Rajan, R. G., & Zingales, L. (1998). Financial dependence and growth. American Economic Review, 88(3), 559–586.Google Scholar
  48. Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. Review of Financial Studies, 27(1), 153–179.CrossRefGoogle Scholar
  49. Sääskilahti, J. (2016). Local bank competition and small business lending after the onset of the financial crisis. Journal of Banking & Finance, 69(1), 37–51.CrossRefGoogle Scholar
  50. Schumpeter, J. A. (1961). The theory of economic development. An inquiry into profits, capital credit, interest, and the business cycle. New York: Oxford University Press.Google Scholar
  51. Snijders, T. A. B., & Bosker, R. J. (1999). Multilevel analysis. London: Sage.Google Scholar
  52. Thornhill S., Amit R. (2003). Comprendre l'échec: mortalité organisationnelle et approche fondée sur les ressources. Document de recherche. Direction des études analytiques, Statistique Canada 11F0019–202.Google Scholar
  53. Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. Journal of Finance, 43(14), 1–19.CrossRefGoogle Scholar
  54. Wiens J., Jackson C. (2015). The importance of young firms for economic growth, 13th of September, The Kauffman Foundation.Google Scholar
  55. Whited, T. (1992). Debt, liquidity constraints, and corporate investment: evidence from panel data. The Journal of Finance, 47(2), 1425–1460.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Dipartimento di Scienze Aziendali e GiuridicheUniversità della CalabriaRendeItaly
  2. 2.University Paris Nanterre, EconomiXNanterreFrance

Personalised recommendations