Debt and financial fragility: Italian non-financial companies after the pandemic

This paper analyses the evolution of debt of Italian firms from 2010 to 2020 with special focus on the first year of the Covid-19 pandemic. We use quantile regressions to assess the vulnerabilities of the most indebted firms. On average Italian non-financial companies (NFCs) reduced their indebtedness over the sample period, a trend which continued during the first year of the pandemic. By exploiting the high heterogeneity in the data, however, we find that the turmoil affected the most indebted firms for which the trend of declining indebtedness was reversed. Moreover, sectors that were suspended during the first lockdown already had the highest levels of the debt-to-assets ratios, and experienced the steepest increase in debt in 2020. Finally, our results show that highly indebted firms exhibit a qualitatively different behaviour compared to the rest of the sample. Excessive debt build-up severely increases the likelihood of non-financial companies exiting the market.