Early warning indicators: An empirical investigation in Italian context and first implications for corporate governance

Abstract

The aim of this paper is to map the exposure to the risk of financial distress and insolvency of Italian companies during 2019 by monitoring the five early warning indicators defined by the National Council of Chartered Accountants and Accounting Experts (CNDCEC) and approved by the Italian Ministry of Economic Development, in accordance with the provisions of the “Crisis and Insolvency Code” (IC-Code). The methodology used to conduct these investigations consists of comparing the average value of each early warning indicator for companies belonging to a specific commodity-related sector to the threshold value established for each sector, in order to capture signs of potential financial distress. The results of the analysis show that Italian limited liability companies (LLC) and joint-stock companies (JSC) (listed and unlisted) in 2019 did not show particularly worrying signs of financial distress and insolvency. The results of the survey are relevant to national regulators, managers, investors, lenders and, more generally, market participants as they shed light on the type of commodity-related sectors in which economic and financial difficulties are more likely to occur. Moreover, the continuous monitoring process of the early warning indicators’ average values can provide valuable support to the CNDCEC to verify whether and how to modify/refine their thresholds, thus improving their ability to report foreseeable states of financial distress