The Italian depreciation suspension policy during the COVID-19 pandemic: consequences on private firms’ borrowing capacity

ABSTRACT

We investigate the consequences of adopting a new accrual-based relief mechanism on private firms’ borrowing capacity. During the COVID-19 pandemic, the Italian government implemented a temporary change in accounting rules that allowed firms to suspend up to the entire amount of their depreciation and amortisation charges. Using a sample of Italian firms from 2018 to 2021 and a difference-in-differences model, we show that the depreciation and amortisation suspension policy (DASP) adopters, compared to non-adopters, access larger loans and negotiate a lower cost of debt than in the pre-DASP period. Our results are robust to additional tests for potential endogeneity and confounding factors such as earnings management and the adoption of other accounting-based relief mechanisms. We provide evidence that accrual-based relief mechanisms have real economic effects and are effective measures to support firms in managing a systemic shock.

Keywords:

• COVID-19 relief mechanism
• private firms
• bank debt
• cost of debt
• depreciation policy

JEL Classifications:

• M40
• M41
• M48

Acknowledgements

The authors would like to thank the Editor, the anonymous reviewers, Diogenis Baboukardos, Andrea Melis, Lucia Murgia, Iannis Tsalavoutas (chair) and participants at the 25th Financial Reporting and Business Communication Annual Conference (BAFA) for helpful comments. Financial support from the Fundação para a Ciência e a Tecnologia (through project UIDB/00731/2020) is gratefully acknowledged. All errors and omissions are the authors’ own.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1 Although lockdown rules and social distancing requirements saved lives, they also contributed to the collapse of economic activity, with a dramatic drop in GDP growth by 3.3% (data retrieved from the World Bank website, https://data.worldbank.org/).

2 According to a recent survey (Facebook/OECD/World Bank, 2020), even the majority of small and medium enterprises that remained open during 2020 experienced a decline in sales, and almost half of them reported a decrease of more than 40%.

3 If the revalued asset is subject to the depreciation (amortisation) process, the depreciation (amortisation) expenses may increase in the following reporting periods.

4 We use the Heckman (1979) two-step procedure to correct for potential self-selection bias of our non-random sample.

5 The sample criteria applied allows us to follow the evolution of firms’ borrowing capacity for two fiscal years post-DASP adoption (2020 and 2021 fiscal years). Hence, our analysis does not consider the suspension of D&A charges in the 2021 financial statements. For the sake of completeness, we find that only 146 unique firms fit the definition of Adopters in the 2021 fiscal year, compared to 1,144 Adopters in 2020.

6 Moreover, to confirm whether our results remain consistent, we run our models using robust regression estimation that produces less biased estimates than OLS regressions (Leone et al., 2019). We reach similar findings (available upon request) as those presented in the main analysis reported in Table 6.

7 Extreme observations have been found, especially for the Cost of Debt %, as also suggested by the prior literature (Pittman & Fortin, 2004; Sánchez-Ballesta & García-Meca, 2011). Thus, we winsorised continuous variables at the 5th and 95th percentiles.

8 Additionally, we assess the potential multicollinearity among the variables by estimating the variance inflation factor (VIF) coefficients for each regression model; all of them remain below the threshold of 10 (Kennedy, 2008), hence confirming that our analyses are not affected by multicollinearity.

9 We use the European Commission’s recommendation of May 6, 2003 (2003/361/EC), in which they define micro, small, and medium-sized enterprises, and we apply this definition consistently with prior studies on European firms (Vander Bauwhede et al., 2015).

10 The sample contains a lower number of unique firms in the last year (2021) due to the lack of available data in AIDA (Bureau Van Dijk) at the time of the export.

11 Additionally, we corroborate our results by using a more restrictive sample selection criterion which keeps only firms closing the fiscal year on December 31st, 2020. Our findings remain robust and qualitatively unchanged from those reported in Table 6.

Additional information

Funding

This work was supported by Fundação para a Ciência e a Tecnologia: [Grant Number UIDB/00731/2020].