From VoxEU:
Pietro A. Bianchi, Antonio Marra, Donato Masciandaro, Nicola Pecchiari 13 September 2017
Economic theory doesn’t provide a clear prediction on how a firm’s performance will be affected if some of its board members have ties to organised crime. This column explores this issue using a unique Italian dataset that includes confidential information about ongoing investigations. Seven percent of firms are found to have at least one director under investigation, and these firms demonstrate, on average, lower levels of cash holdings and worse profitability compared with ‘untainted’ firms.
What are the corporate consequences of having board directors connected to organised crime? The economic consequences of organised crime go beyond the obvious social implications – they extend to the entire global economy. The presence of criminal organisations increases the riskiness and uncertainty of the business environment, ultimately lowering the growth potential of the economy (Pinotti 2015a, Ganau and Rodriguez-Pose 2017). The private sector faces risk – firms expect a business environment with fair, clear, and transparent tax and trade policies, but they have strong incentives to engage in illegal behaviour when they believe their competitors are receiving unfair advantages (World Bank 2016). Thus a natural question to ask is whether and to what extent the private sector is polluted by organised crime? And, more importantly, does the presence of criminal organisations generate economic consequences on firm operations and value?
In recent work, we contribute to the literatures on both corporate governance and organised crime by assessing the economic consequences when firms are ‘tainted in the board room’ (Bianchi et al. 2017). Specifically, we test the influence of directors whose criminal records display potential involvement with criminal organisations on firm operations and firm value.
Beyond the relevance of the issue, the empirical literature on crime has largely neglected to examine the micro-level economic consequences of organised criminal organisations. Among the exceptions, a few studies (Bandiera 2003, Buonanno et al. 2015, Dimico et al. 2017) examine the historical origins of the Sicilian Mafia. Moreover, Mastrobuoni (2015) analyses the importance of criminal connections inside an Italian-American criminal organisation (i.e. Cosa Nostra). Dell (2015) estimates the effects of law enforcement on trafficking networks in Mexico. Pinotti (2015b) estimates the economic cost of organised crime in two regions of southern Italy. Finally, Pinotti (2015a) examines the cross-country correlation between organised crime and measures of institutional quality.
Surprisingly, the finance and economics literatures are largely silent about the mechanisms through which criminal organisations taint corporations in pursuing their illegal goals. The literature on crime has explored the relationships between organised crime, finance, and the legal sector, shedding light on money laundering phenomena. Only in recent times has economic analysis focused more broadly on the financial aspects of illegal activities. As more and more attention has been directed towards money laundering, there has been a growing awareness of the need to examine any law violations that generate revenue (Masciandaro 1999, Argentiero et al. 2008, Dalla Pellegrina and Masciandaro 2009, Ferwenda 2009, Levi and Reuter 2009, Ardizzi et al. 2014).
Polluted corporate governance in Italy
In general, the presence of board members who are tainted by organised crime represents an internal risk which can affect firm financial policies differently. Corporate performance can be influenced by both downside and upside risks. On the one hand, when the corporation is used to launder money, firms can benefit from the presence of tainted directors if they can trade proceeds from illegal activities for business opportunities. More generally, the presence of tainted directors makes a firm more profitable due to the illegal advantages the criminal organisation affiliated with the director is able to generate. At the same time, the need to reduce the probability of detection can influence the financial policies of the firm.
On the other hand, the presence of tainted directors can worsen firm profitability through their illegal behaviour. Further, from a financial perspective, firms might manage cash holdings downward in an attempt to lower the risk of being targeted by criminal organisations....MORE
"Worsen firm profitability...". Ya think?
Previously:
"Mafia cash in on lucrative EU wind farm handouts - especially in Sicily"
Long time readers know that I am just fascinated by this stuff, see links below....
The Sicilian Mafia and the International Lemon Cartel
Italian mobsters buck downturn
So a Sicilian mafioso walks into HSBC…
Mafia crime is 7% of GDP in Italy, group reports
Police in Italy Seize Mafia-linked assets worth $1.9 billion "Mob was Going Green"
Hayek and the Mexican Mafia
Italian mobsters buck downturn
Talkin' Trash and Makin' Cash: Crime and Illegal Landfills in Scotland
Alphaville Strays onto Our Turf: "Property rights and the economic origins of the Sicilian mafia"
Renewables: Police Confiscate €1.3 Billion ($1.7 Billion) From Italian 'God of Wind'
Okay, maybe Capo di tutt'i capi Murphy and his consiglieri weren't
technically on our turf, having established some claim of their own:
Gangster economics
The non-Yakuza bounce
Goodfella game theory
So a Sicilian mafioso walks into HSBC…
GANGSTERS MANIPULATING OIL PRICE!
Yakuza makes traders offers they can’t refuse
