Effects of Fixed Capital Investments in current economic downturn

Abstract

The aim of this paper is to verify both the impact and influences when investing in fixed assets on probability of default. Using data from an extensive sample of Italian firms (6,000 Italian SMEs), we find that fixed assets are negatively related to efficiency and this fact leads to a greater instability with the consequence of a direct impact on the risk of insolvency. A portrait of firms in 2011, after the flash-over of the current economic downturn, subdividing them in firms that made fixed capital investments in 2008, three years before, and the others, which had no plan to increase tangible fixed assets. The results are consistent with the hypothesis that the solvency ought to decrease with rigidity of assets, especially in the area of commercial firms.