DEMB Working Paper Series N. 13. A counterfactual analysis of the bank-industry relationship in Italy,

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1 DEMB Working Paper Series N. 13 A counterfactual analysis of the bank-industry relationship in Italy, Carlo Drago 1 Roberto Ricciuti 2 Alberto Rinaldi 3 Michelangelo Vasta 4 May University of Naples 2 University of Verona and CESifo 3 Dipartimento di Economia Marco Biagi, e RECent Università di Modena e Reggio Emilia Viale Berengario, 51, Modena, Italy - Phone: University of Siena ISSN: X online [ 1 ]

2 A counterfactual analysis of the bank-industry relationship in Italy, * Carlo Drago Niccolò Cusano University - Rome Alberto Rinaldi University of Modena and Reggio Emilia and RECent Roberto Ricciuti University of Verona and CESifo Michelangelo Vasta University of Siena ABSTRACT Until the banking reform in 1936, banks and industrial companies in Italy were strongly intertwined (both in terms of ownership and interlocking directorates). Using Imita.db a large dataset containing data on over 300,000 directors of Italian joint stock companies this paper analyses what would have happened to the Italian corporate network in the years 1913, 1921, 1927 and 1936 if the German type universal banks and their directors would have not been there. Our test shows that new centers of the system would have emerged (financial and electricity and phone companies), confirming the interconnected nature of the Italian capitalism. We also analyze two industries, textiles and iron and steel, characterized by different labor-to-capital intensities to check for sectoral differences. Contrary to conventional wisdom, we find that local banks were important in funding both industries. Overall we call into question the role of universal banks as a driver of Italian industrialization. Keywords: corporate governance, economic history, network analysis. JEL codes: N24; L14; G21; G34 * We would like to thank the participants in the SIDE-ISLE 2012 Eight Annual Conference (Rome, December 2012) and in the 9th BETA Workshop in Historical Economics (Strasbourg 3-4 May 2013) for their helpful comments. The work has also benefited from the use of Imita.db, a large dataset funded by Miur, the Italian Ministry for University and Scientific Research. The usual disclaimer applies.

3 1. Introduction The relationship between banks and industry and the role of the German-type universal banks in fostering Italy s industrialization in the early twentieth century has been widely debated in Italian economic historiography. The first contribution can be traced back to Grifone s (1945) formulation on the centrality of finance capital in the Italian corporate system. This view was inspired by Hilferding s (1910) theory of finance capital and stated that the financial control of credit flows and, more rarely, part of the firm s equity, enables banks to determine the behavior of industrial firms. This approach identifies three major channels of bank influence over industrial companies: capital participation, sharing of board seats and monitoring over day-to-day financial affairs. In his path breaking contribution, Gerschenkron (1962) singled out the main universal banks, Banca Commerciale and Credito Italiano founded in the 1890s with German capital and Banco di Roma founded in 1880, as one of the major cause of Italy s big spurt of the period. In his view, these banks functioned as a substitutive factor that prompted Italy s economic growth by providing a significant financial support and an qualified managerial advice to the major industrial companies of the country, especially in modern capital-intensive sectors such as steel, heavy engineering, electricity, shipping and so on. According to Gerschenkron, their contribution was outstanding particularly on the diffusion of modern banking techniques within a backward environment. Subsequently, the role of universal banks has been reconsidered by the various contributions by Confalonieri ( , 1982, 1992, 1997). He provides little support for Gerschenkron s hypothesis, at least for the period before WWI, by stressing the continuity between the new German-type universal banks and their French-style antecedents as the former hired most of the staff and followed the practices of the latter. Confalonieri argues that the Italian universal banks were more concerned with standard banking activities, i.e. lent money on a project by project basis, than with planning an overall industrial strategy. Last but not least, Confalonieri maintains that the universal banks avoided permanent ownership of industrial companies and they accepted shares only as guarantee for loans. This strategy collapsed when the post-wwi crisis made impossible for many companies to repay their debts to banks. Thus the banks unwillingly became the real owners of much of the militaryindustrial complex and of several important firms in other industries. When the Great 2

4 Depression struck, the entire system collapsed and both the banks and their industrial clients were bailed out by the State. Later on, the first quantitative contributions provided by Fohlin (1998, 1999) contributed to shed light on the issue. First of all, she shows that the universal banks tend to establish their networks on large well established companies instead of trying to create connections with promising, but risky, small firms, which needed venture capital. She also finds that firms belonging to the universal banks networks performed similarly in terms of growth of financial capital, fixed assets and revenues to those lacking the potential benefit of bank affiliation. This latter point is also confirmed by Battilani (1995) in a case studies on a sample of cotton firms in the 1920s. To sum up, we can say that the Gershenkronian tale is contradict by the results obtained by Fohlin, who suggests that the German style universal banks played a limited role in fostering the investment of Italian firms during the first wave of industrialization. Accordingly, the role of universal banks as one of the most powerful engine of growth must be reconsidered. In recent years some studies have analyzed the characteristics of the Italian corporate system on the basis of the new law and finance theory (La Porta et al. 1998, 1999, 2008) This approach suggests that legal protection of investors is the crucial determinant of capital market development, ownership concentration, and organizational structures and argues that legal protection is ultimately a by-product of a country s legal origins. According to this view, if a country has a high shareholding protection, as typical of the Common Law regulation, its economy will be characterized by a higher development of the stock market and an incidence of widely held companies à la Berle and Means (1932). In contrast, countries with a low shareholders protection, as typical of the Civil Law regulation, are generally characterized by higher ownership concentration, a greater role of the banks and the state, and to a larger resorting to non-market relationships for inter-firm coordination. Despite the degree of investor protection improved considerably along the 20 th century, according to La Porta et al. (1998) Italy still ranked, at the eve of the 21 st century, as one of the worst performers among industrial nations as concerns legal safeguard for investors. In the period covered by this paper, the Italian stock market was virtually self-regulated. Firms could issue shares with multiple votes and use cross-shareholdings without limitation. Banks were allowed (until the 1936 banking law) to own industrial companies, lend money at shortand long-term, underwrite industrial security issues, and hold deposits. Effectively, banks 3

5 (and especially the largest universal banks) served the role of venture capitalists, investment and commercial banks. Until the Civil Code of 1942, there were no rules describing the extent of information disclosure that companies had to provide to shareholders (Aganin and Volpin 2003). Recent historiography puts the analysis of the bank and industry relationship in the frame of the corporate governance perspective. Thus, Battilossi (2009) and Brambilla (2012) argue that unsound practices by the universal banks in the interwar years were permitted and to some extent enhanced by the systematic failures of public and private governance institutions to act as disciplinary devices for banks risk-taking. In particular, these authors point that, in order to reject takeover attempts by, respectively, the Ansaldo group and the Fiat-Snia groups, Banca Commerciale Italiana and Credito Italiano assigned their own equities to ad hoc holding companies, which were owned by the banks themselves and by their allied groups, i.e., large industrial concerns that were also their larger borrowers. Thus, universal banks entered into close and long-run relationships with financed firms that insulated managers from external controls, favoured the elimination of prudential constraints, and increased the potential for conflicts of interest as industrial groups were co-opted among their controlling owners. This degeneration of relationship finance was epitomized by a pathological escalation of equity stakes, possibly further encouraged by expectations that liquidity mismanagement would have been fixed once again by lack of supervision and unconditional bail-outs by monetary authorities when macroeconomic conditions eventually improved. Despite the relevance of the relationships between banks and industry for the Italian economic historiography, only very few studies have analyzed the sharing of board members that is, the system of interlocks between banks and industrial companies in the period prior to WWII. 1 A study by Vasta and Baccini (1997) using a large sample of more than 4,000 Italian joint-stock companies held that the Italian corporate network does not seem to have been characterized by a strong centrality of banks as it was commonly believed. The location of banks at the center of the network could be detected in 1911 and even more in 1927, but this was no longer the case in 1936, after the collapse of the universal banks. By that time, insurance companies and utility companies had replaced banks at the center of the 1 The pioneering works by Zorzini (1925) and Luzzatto Fegiz (1928) found in the mid-1920s a high presence of directors of the two largest universal banks Banca Commerciale Italiana and Credito Italiano on the boards of electric power companies and, more generally, a high concentration of the whole corporate system, in which 2 per cent of directors controlled more than one-third of the total share capital of Italian joint-stock companies. 4

6 system (Baccini and Vasta 1995). These authors also find that a highly stable system of interlocks existed in parallel to that centered on the banking system, and remained substantially unchanged over the years. However, some doubts have been cast on the significance of these results because the universal banks were often represented on the boards of industrial firms by managers, the so-called fiduciaries, who were not themselves members of the board of the banks (Pino Pongolini 1991; Cohen and Federico 2001). This article investigates the links between the Italian universal banks and the corporate economy by focusing on cross-memberships in boards of directors of joint stock companies (interlocking directorates). This approach, which has its origin in modern sociology, gained, in the last decades, significant spaces in all social sciences, including economics and, with a certain delay, also in economic and business history. 2 The use of interlocking directorship technique can play a dual role by complementing, on the one hand, the traditional case-study method and, on the other hand, by allowing broad overviews of the corporate systems under investigation, which also helps the verification of different theoretical perspectives. This paper first analyzes the structure of the Italian corporate network in four benchmark years 1913, 1921, 1927 and 1936 using Imita.db, a large dataset containing information on over 300,000 directors of Italian joint-stock companies. Then it presents a counterfactual experiment, by showing what would happen to the network if the universal banks and all their directors had been eliminated. This analysis is replicated for the textile and iron and steel industries, characterized by different labor-to-capital intensities, to check for sectoral differences. The paper is organized as follows: after this Introduction, Section 2 describes the data and the sources and Section 3 illustrates the methodology utilized for this study. Sections 4 presents the results of our counterfactual tests, while Section 5 focuses on actor centrality. Section 6 replicates the counterfactual exercise for two industrial sectors (textiles and iron and steel). Lastly, Section 7 concludes. 2. Data and sources The source we used for this work is Notizie statistiche sulle principali società italiane per azioni, edited and published by Credito Italiano, from 1906 to 1925, and since 1928, by the Associazione fra le Società Italiane per Azioni. The Imita.db database is an electronic 2 The necessity to introduce new methodologies and the opportunity to integrate much more economic, business and social history has been recently maintained by Jones, van Leeuwen and Broadberry (2013). 5

7 version of this source. 3 This dataset contains information regarding companies, boards of directors, and balance sheets of a large sample of Italian joint-stock companies for several benchmark years. 4 The source includes all the joint-stock companies listed on one of the Italian stock exchanges, together with those companies located in Italy whose share capital at the closure of the last balance was higher than a set threshold, which varied from year to year. 5 On the whole, the dataset contains data on more than 38,000 companies, almost 300,000 directors, and more than 100,000 balance sheets. Representativeness, in terms of capital, is very high as the sample covers well over 90 percent of the total universe in all but the first benchmark year, 1911, for which the share is around 85 percent. In this paper, we focus on the benchmark years 1913, 1921, 1927 and As for the directors, we used only data for members of a board of directors in the strict sense, leaving out the members of Collegi sindacali. 6 We have carefully standardized the names of the directors to make them as homogeneous as possible. However, we estimate that the information on boards of directors contained in Imita.db has a margin of error of about 1 percent, as is the case with other similar databases (Mintz and Schwartz, 1985). These errors are mainly due to cases of homonymy, misprints, or shortcomings in the source. 3. Methodology Starting from the actual networks we analyze and test for each benchmark year some counterfactual hypotheses about the network structure. In particular, starting from a defined network and considering a counterfactual, we consider an initial two way matrix related to the network, and then we consider a second matrix related to the counterfactual effects. The effects of the change could be distinguished between global and local. Global effects can be referred to the structural effects in the entire network, whereas local effects are related to the position of the single node in the network. The global effects of the network counterfactuals are related to network stability and network connectedness, whereas the local effects are related to the different stability and robustness to change of the communication 3 Imita.db is one of the worldwide largest datasets on joint-stock companies in historical perspective. For details on the database, see: Vasta (2006) The database is available on line: 4 Data for companies and boards of directors are available for 1911, 1913, 1921, 1927, 1936, 1952, 1960, 1972, and 1983; for balance sheets, time series are available for the span from 1900 to 1971 and for 1982 and The threshold was set at 1 million Italian lire until 1940, with the sole exception of 1914, when it amounted to 500,000 lire. 6 Collegi sindacali are special committees of auditors, and are somehow similar to supervisory boards (Scott 1985). 6

8 channels into the network. In particular, it is possible to consider the role of the different nodes in a network by these types of simulation experiment is possible to analyze the impact of changes into the roles of the network (Borgatti 2003, 2005, 2006). Analytically, we start from an adjacency matrix A s, of binary elements A s (i, j) = 1, in which we can observe a connection between the firms i and j and A s (i, j) = 0 does not exist any connection. This matrix refers to the baseline adjacency matrix and that could be considered like the matrix in which every counterfactual experiment is compared. For this matrix we compute all the different network measures representing the baseline network indexes to compare with the counterfactuals experiments. In this sense, we consider a second matrix in which we obtain a different counterfactual by considering a defined perturbation to the network. A single perturbation could be theoretically considered as an elimination of a single node or an elimination of a single vertex. In both cases we recomputed all the network measures for each counterfactual experiment. Then we compare the results obtained with the two procedures. The structure of the Italian corporate network at various times in the 20 th century has already been explored in Vasta and Baccini (1997) and Rinaldi and Vasta (2005, 2011 and 2012) by using network analysis techniques. This paper adds to the previous studies by performing a counterfactual experiment for each of the benchmark years considered. Our procedure works as follows: firstly, we compute statistics for the actual networks in all the benchmark years; secondly, we eliminate the universal banks Banca Commerciale Italiana, Credito Italiano, Banco di Roma, Banca Nazionale di Credito and Società Bancaria Italiana 7 and all the directors who sit in at least one universal bank and in any other boards of directors. In this way, if a given director sits in the boards of directors of an universal bank and two industrial companies, we cut the links between the universal bank and each of the two companies as well as the link between the two industrial companies. 8 7 Bankruptcies and mergers changed over time the landscape of universal banks in Italy: Banco di Roma was founded in 1880, while Banca Commerciale Italiana in 1894 and Credito Italiano in Società Bancaria Italiana was established in 1904 and, because of the crisis of the iron and steel industry in 1911, it merged in 1914 with Società Italiana di Credito Provinciale, establishing the Banca Italiana di Sconto, which bankrupted in What remained of the Banca Italiana di Sconto gave rise to the Banca Nazionale di Credito which in 1930 merged with Credito Italiano. 8 In a preliminary paper (Drago, Ricciuti, Rinaldi and Vasta 2013) we performed also a less demanding counterfactual experiment in which we eliminate only the universal banks but retain the board positions that their directors held in any other companies. The difference between the actual network and the counterfactual one obtained in this way was very small so we eventually decided to drop it. 7

9 In addition to the analysis of the whole networks, we also compare interlocking directorates in two sectors (textiles and iron and steel) that are characterized by different factor intensity: the former is labor-intensive whereas the latter is capital-intensive. We expect that banks are considerably more connected with the iron and steel sector because it requires more capital for investment. Sharing board members enhances the ability of the banks to monitor the performance of the companies and therefore the possibility of getting their money back. For both sectors we performed the counterfactual described above for each benchmark year. In the Appendix we provide summary statistics of all these networks. 4. The structure of the network Table 1 reports a number of statistics for the actual networks in the four benchmark years and the relevant counterfactual. The number of vertices (in our case, companies) is related with the number of nodes in the network. This number increases from 1913 to 1921, reaches a peak in 1927 and then decreases in 1936, as a consequence of the reduction in the number of firms included in our sample due to the Great Depression. At the same time n*ln(n), which measures the diameter of the graph, 9 and the total number of adjacency index which measures the number of edges (in our case, interlocks between companies) in the network show the same pattern. Zagreb Indexes 10 and Randic Index 11 show the same behavior as well. Therefore, the structure of the network became more complex from 1913 to 1927, but in 1936 complexity decreased. This pattern seems related with the extensive bankruptcies that occurred after the 1929 crisis. Relinking 12 and Platt 13 indices and the average degree 14 also increase from 1913 to 1927 and decreased in The substantial increase in the connectedness and complexity of the network from 1913 to 1927 and its subsequent decline in 1936 seem to contradict the predictions of the law and finance approach. In fact, in the absence of any significant change in degree of investor 9 The diameter is the longest geodesics of the network, i.e., the length of the path between the two most distant nodes (De Nooy, Mrvar and Batagelj 2011). 10 The Zagreb Index (M1) calculates the sum of the squares of vertex degree, given the graph adjacency matrix. The Zagreb Index (M2) computes the sum of vertex degrees obtained by taking into account all the pairs of adjacent vertices, given the graph adjacency matrix as well. 11 The Randic Index is given by the summation of all products of the vertices degree, taking the inverse root of each term. 12 The index of relinking measures the relinking in a specific network: every semicycle of a p-graph corresponds to a relinking relationship (Batagelj and Mrvar 2008). 13 The Platt Index measures the occurrence of the two-edge sub-graph to measure the complexity of a network. 14 The average degree of a node is the number of edges connected to it. 8

10 protection over the period analyzed, according to this theory there should have been no relevant change in the resorting to non-market forms of inter-firm coordination, such as corporate interlocks and especially bank-centered ones. The Counterfactual exercise changes the network structure to different extents across benchmark years. As expected, the values of two Zagreb Indexes in the Counterfactual are much lower than in the actual networks in all benchmark years. The gap increases constantly from 1913 to 1921 and to 1927, when the removal of the individuals with at least one directorship in a universal bank has the stronger effect in reducing the connectedness and complexity of the network. Then, in 1936 the effect of this exercise declines as the difference between the complexity of the two networks (actual and counterfactual) fades with regard to the previous benchmark year. It is also worth noticing that the variation over time of the Zagreb indexes is much lower for the counterfactual network than for the real one. The average degree shows the same pattern in all benchmark years, even though the difference is much lower than for the Zagreb indexes. We can notice that the average degree in the counterfactuals has rather high values in absolute terms, ranging from 9.9 in 1936 to 12.8 in They are only slightly lower (with the difference ranging from 11% in 1936 to 34% in 1927) and more stable than those in the actual networks. This seems to show that a stable system of interlocks existed in parallel to that centered on the universal banks. 5. Actor centrality In network analysis it is assumed that actors that are central have better access to information, better opportunities to spread information and someway a power to coordinate the whole network. We use nbetweenness as the measure to calculate the centrality of firms. This measure is based on the idea that a firm is more central if it is more important as an intermediary in the communication network. So it calculates for each actor (company) the number of shortest paths between any pairs of actors in the network that pass through this actor (De Nooy, Mrvar and Batagelj 2011). Table 2 provides the mean for the deciles of nbetweenness, across actual and counterfactual networks. Within each benchmark year the mean of nbetweenness in each decile is quite similar, which can be expected in very large networks as the ones we are 9

11 analyzing. 15 In all benchmark years the mean of the three lowest deciles is zero. Such a result is due to the high proportion of isolated firms (i.e., firms that are not interlocked to any other firms) which is not surprising in such large samples. The mean is zero for the four lowest deciles in 1927 and for the five lowest deciles in 1936, in both cases for both the real and counterfactual network. Across benchmark years the mean of the two highest deciles becomes smaller moving from 1913 to In particular, we find that the Counterfactual network differs from the actual one in the mean of nbetweenness in the three highest deciles, where it is higher in all benchmark years but Thus, removing universal bank-industry interlockers seems actually to increase centrality of other subjects, making them even more connected than those that were removed. Tables 3 to 6 show the nbetweenness of the twenty most central companies and the relevant counterfactual in the four benchmark years. The actual networks statistics show the prominent position occupied by the universal banks, some iron and steel producers, electricity companies, and railway companies. Looking over time at the real networks, the universal banks strengthen their central position in the ranking. In 1913 we find three of these banks (1 st, 5 th and 13 th ) among the top twenty, whereas in 1921 we have four of them (1 st, 3 rd, 8 th, and 17 th ), and in 1927 the same number of banks are ranked 1 st, 3 rd, 4 th, and 6 th, taking even more ground. In this sample 1927 represents the apex of the role of these banks, since in 1936 we find only two universal banks among the twenty most central companies, ranked 7 th and 20 th, respectively. The Counterfactual has some deep effects on the ranking of firms. First consider 1913 (Table 3). The three universal banks disappear because, by construction, they have been removed from the sample. The top of the ranking marginally changes, with companies moving up by one position because of the removal of Banca Commerciale Italiana. However, in lower positions we observe some serious changes: Unes Unione Esercizi Elettrici moves from the 11 th to the 6 th position, Società Elettrica della Sicilia Orientale from 18 th to 11 th, and Officine Meccaniche Italiane from 20 th to 14 th. Five other firms in addition to the three universal banks disappear from the top twenty, while eight firms that did not appear in the actual ranking make their entry. The pattern in 1921 in similar: stability in the very first ranks, a number of shifts due to removal of the universal banks, and the changes from the middle to the bottom of the ranking 15 In fact, we have 1,243 companies in 1913, 3,076 in 1921, 4,477 in 1927 and 4,244 in

12 (Table 4). A few companies become more central, strongly improving their rank: Unes Unione Esercizi Elettrici from 16 th to 3 rd and Banca Bergamasca di Depositi e Conti Correnti from 20 th to 11 th. Five companies that were not in the ranking of the actual network appear in the top twenty in the Counterfactual. As noted before, 1927 is the benchmark year in which universal banks had the largest influence in the network. Not surprisingly, this is also the year in which removing their interlockers has the widest effect. In Table 5 we find that a half of the most central companies ten out of twenty went out of the top twenty in the Counterfactual and were replaced by as many companies. In the last experiment (1936, Table 6), the universal banks have already lost their power, therefore the removal of their interlockers has a very limited effect. The first six positions are virtually unchanged, the reshuffling is usually limited within 3-4 positions. Only four companies that were not in the ranking in the actual network enter among the top twenty in the Counterfactual but are placed from 17 th to 20 th position. We emphasize that Credito Italiano Italy s second largest universal bank in the actual network is relegated in 24 th position. Thus, our analysis has shown that the centrality of the universal banks in the Italian corporate system varied over time. It increased from 1913 to 1927, but then it decreased sharply in 1936, after the universal banks had been severely struck by the Great Depression and had been eventually bailed out by the big state-owned holding Iri (Toniolo 1980; Zamagni 1993). Nonetheless, the demise of the universal banks did not lead to a disentangling of the network, as new centers with a high value of nbetweenness emerged and played a key role in assuring the cohesion of the system. Our counterfactual experiments support Vasta and Baccini s (1997) claim that a sizeable and stable system of interlocks existed in parallel, or as a complement, to that hinged on the universal banks. This can be detected in all benchmark years, including 1927, when the influence of the universal banks was higher. Until 1927, such a system of interlocks extraneous to the universal banks was mainly centered on electricity companies, some large steel and trade companies and the Banca d Italia, at that time a jointstock bank. In 1936, it still hinged on electricity companies together with some new actors such as insurance companies and some mandatory syndicates that had taken up a central role. 11

13 6. Comparing labor- and capital-intensive industries In this section we analyze the bank-industry relationship in two sectors characterized by different relative intensities of factors of production: textiles and iron and steel. The former is labor-intensive whereas the latter is capital-intensive. In performing this analysis, for each benchmark year we construct two sub-networks: in the former case we take all the banks and all the textile companies, whereas in the latter case we take the banks mentioned above and all the iron and steel companies. 16 The methodology devised for the actual and counterfactual networks is replicated for these sub-networks. Table 7 reports the statistics of these smaller sub-networks. 17 The Zagreb Indexes, the Randic Index and the average degree show higher values for the textile actual sub-networks than for the iron and steel ones. For the two former indexes, these results are possibly due to the smaller size of the iron and steel sub-network compared with all the other networks considered so far. They also possibly reflect the fact that interlocking directorates were a common practice also in such a labor intensive industry as textiles. However, it is worth noticing that the average degree, which is a normalized index whose value is not affected by the size of the sample, shows higher values for the iron and steel sub-networks in all the benchmarks considered, even if the gap with respect to the textile networks is narrow. Perhaps surprisingly, the counterfactual exercise has stronger effect for the textile network, to probably underscore that the links generated by universal banks directors were more relevant for the labor-intensive sub-network. This result probably reflects also the fact that cotton mills, which constituted a sizeable proportion of textiles companies, were a capital intensive industry in the Italian corporate economy at that time, whereas the iron and steel industry does not include only the largest steelworks such as Ilva and Terni, but also several smaller ironworks which used much less capital intensive production technology. Table 8 reports the distribution of mean betweenness for the sub-netwoks. Compared with the whole networks the picture is somehow different. We find that the 9 th decile has a much higher value in these sub-networks than in the main ones, whereas this is not always true for the other. Moreover, the distribution is more stable for textiles when we compare the 16 In the Istat Ateco 91 classification that is used in our dataset, textile companies are coded from 17.1 to 18.2, iron and steel companies from 27.1 to 27.5, and banks In 1913 we have 209 and 101 companies in the textile and iron and steel sectors, respectively; which become 533 and 292 in 1927, 698 and 350 in 1927, 511 and 216 in

14 actual sub-networks with the Counterfactual than for iron and steel. The latter, in particular, shows a reduction of the mean nbetweenness in the highest percentile. We observe three main findings: first, the pattern of the results is similar to those found earlier for the general network, as the effect of a counterfactual shock is increasing from 1913 to 1927 and drops in Second, and this appears surprising, the effect of a counterfactual shock is stronger on the structure of the banks-textiles sub-network than on the banks-iron and steel industry one. Third, many non-universal, small local banks appear among the most central companies, and this feature grows over time with the same pattern of universal banks, and it is more pronounced in the iron and steel than in the textile industry. In 1913 for textile (Table 9), we find two universal and three local banks (plus Banca d Italia) among the twenty most central companies, whereas we find three universal banks and seven other banks in the iron and steel network. The Counterfactual causes some strong changes, more in the textile than in iron and steel, with values of nbetweenness that are higher in the former than in the latter. This effect is possibly due to the smaller role of universal banks in the iron and steel industry (in the real network they are ranked relatively lower than in textiles) and by the larger role of local banks that tend to stabilize the network. In 1921 (Table 10) banks are more represented in both sectors. Universal banks play a central role in both networks. Local banks are marginal in the textile sub-network, while having a much higher incidence in the iron and steel one. The counterfactual shock causes serious changes in the ranking, whereas the values of nbetweenness are not generally lowered. The large effect in the ranking is also exemplified by the considerable churning of companies that were ranked among the top-twenty in the real network, which are replaced by other firms in the counterfactual is confirmed as the year in which the relationship between industrial companies and banks reaches the maximum (Table 11). Among the twenty more central companies for nbetweenness, there are twelve banks (of which three universal banks) in the textile subnetwork and fifteen (of which once again three universal banks) in the iron and steel one. nbetweennes is relatively higher in the capital-intensive industry than in the textile sector. Churning is very high in both counterfactuals and industries. In 1936 the industry-universal bank relationship is almost ended (Table 12). We find five banks in the textile ranking, and nine in the iron and steel ranking. In both cases there is only one universal bank (Banca Commerciale Italiana), whereas the other two (Credito 13

15 Italiano and Banco di Roma dropped out of the top twenty. The features that we have previously observed in the other experiments are still here, together with a much reduced churning. The overall result that emerges from the analysis of the bank-industry relationship in the textile and iron and steel sectors is that, contrary to conventional wisdom, interlocking directorates were not limited to the larger banks (especially universal banks) and to the larger firms operating in capital-intensive industries. Instead, we have found that the sharing of board members was a common practice in Italian capitalism which involved to a large extent also small local banks and small firms operating in labor-intensive industries. This suggests that another peculiarity of Italian capitalism, i.e., the presumed dwarfism of its entrepreneurial base, could at least in part be reconsidered. In fact, as interlocking directorates are an element that makes it possible to broaden a firm s boundaries, we can assert that at least some of the Italian small firms were less small than it was commonly believed. In particular, our counterfactual experiments make us reconsider the respective roles of larger and smaller banks in Italian industrialization. Actually, the formation of the Italian banking system in the 19 th century was characterized by the creation of a few larger banks (first French-style and then, after the 1893 banking crisis, German-style) that operated on the national level and of some thousand smaller banks, credit societies and saving banks that operated on the local level. The conventional wisdom in Italian historiography maintains that, until WWII, the funding of industrial ventures, especially in capital-intensive industries in the North-Western regions of the country, was carried out principally, if not exclusively, by the larger banks, especially the German-style universal banks. According to this view, smaller local banks started to play a relevant role in the financing of industry only in the 1950s during the Golden Age, as a part of set of policies devised to promote small manufacturing firms. The central bank played a decisive role in this respect as after WWII it prompted a restructuring of the banking system to strengthen the local banks that funded small firms clustered in the industrial districts in the North-Eastern areas of the country. The growth of the former was strongly associated to that of the latter. In fact, throughout the post-wwii period the national banks within industrial districts had a much lower share of the local credit market than elsewhere. Lower assessment, monitoring, and enforcement costs, and social connections between local banks managers and local entrepreneurs gave local banks a competitive edge within the industrial districts. Bank competition was restricted to prevent an 14

16 increase in industrial concentration since it was felt that if the small firms were deprived of necessary credit they would be forced to merge with the larger firms (Conti and Ferri 1997; Conti 1999; Carnevali 2005). Instead, our analysis has shown that prior to WWII universal banks were less central than it was commonly believed and that in some regions of the North (Lombardy and some areas of Piedmont and Veneto) small local banks had established strong ties with industrial companies already in the 1910s. The strength of these ties grew in the interwar years. A dense web of ties between local banks and industrial companies can be detected for both a laborintensive industry as textiles (and this could be expected) and, to a larger extent, for a capital intensive industry as iron and steel (and this appears surprising). This probably indicates that the competitive advantage of local banks lower assessment, monitoring, and enforcement costs, and social connections between local banks managers and local entrepreneurs that have been emphasized in the literature to explain the growth of the post-wwii industrial district of the North-East of the country were already at work since at least the 1910s also in the regions of Italy s first industrialization, especially in Lombardy. They seem to have played a role in fostering Italy s industrial spurt prior to WWI, and also in the 1920s, which has not received an adequate recognition by historiography. 7. Conclusions This paper has investigated the links between the universal banks and the corporate economy in Italy by focusing on cross-memberships in boards of directors of joint-stock companies (interlocking directorates). It has first analyzed the structure of the Italian corporate network in four benchmark years: 1913, 1921, 1927 and Then it has presented a counterfactual experiment, by showing what would happen to the network if the universal banks and all their directors had been removed. This analysis has been replicated for the textile and iron and steel industries, characterized by different labor-to-capital intensities, to check for sectoral differences. The main results of this paper support the criticism towards the conventional wisdom about the centrality of universal banks in fostering Italian industrialization. The counterfactual exercise has shown that the centrality of the universal banks in Italian corporate system varied over time. It increased from 1913 to 1927, but it decreased sharply in 1936, as a consequence 15

17 of the 1930s crisis. Nonetheless, contrary to the conventional wisdom, Italian capitalism seems to be structured to a remarkable extent on a sizeable and stable system of corporate interlocks which existed in parallel to that centered on the universal banks. This latter system can be detected in all benchmark years, including 1927 which marked the apex of the influence of the universal banks. Until 1927, such a system of interlocks extraneous to the universal banks mainly hinged on electricity companies, some large steel and trade companies and the Bank of Italy, at that time a joint-stock bank. In 1936, it was still centered on electricity companies together with some new actors a few large insurance companies and mandatory syndicates that had taken up a central role. Finally, by using the same methodology this paper has analyzed the bank-industry relationship in two sectors characterized by different relative intensities of factors of production: textiles (labor-intensive) and iron and steel (capital intensive). This exercise provides three main findings: first, the pattern of the results is similar to those found for the general network, as the effect of a counterfactual shock is increasing from 1913 to 1927 and drops in Second, and this appears surprising, the effect of a counterfactual shock is stronger in the banks-textiles sub-network than in the banks-iron and steel one. Third, many non-universal banks especially local banks appear among the most central companies. This feature grows over time and is more pronounced in the iron and steel than in the textile industry. Thus, it does not seem that the universal banks had higher propensity to be linked to capital-intensive iron and steel companies than to labor-intensive textile ones. At the same time, financing industrialization was not limited to a few large universal banks, but was a common practice (at least in the North) that involved many smaller local banks which in turn developed a dense web of ties with industrial companies. References Aganin, A., and Volpin, P. (2003). History of Corporate Ownership in Italy, Ecgi Finance Working Paper, No. 17. Baccini, A., and Vasta, M. (1995). Una tecnica ritrovata: interlocking directorates nei rapporti tra banca e industria in Italia ( ), Rivista di storia economica, n.s., 12(2), pp Batagelj, V., and Mrvar, A. (2008). Analysis of Kinship Relations with Pajek, Social Science Computer Review, 26, pp

18 Battilani, P. (1995), Il ruolo della strategia finanziaria nella performance dell industria cotoniera italiana nel periodo fra le due guerre, Rivista di storia economica, n.s., 12, pp Battilossi, S. (2009), Did governance fail universal banks? Moral hazard, risk taking, and banking crises in interwar Italy. Economic History Review, 62, special issue, pp Berle, A.A, and Means, G.C. (1932). The Modern Corporation and Private Property. London: Macmillan. Borgatti S.P. (2003). The Key Player Problem, in Dynamic social network modeling and analysis: Workshop summary and papers page 241 National Academy Press. Borgatti, S. (2005). Centrality and network flow. Social Networks, 27, pp Borgatti S.P. (2006). Identifying Sets of Key Players in a Social Network, Computational & Mathematical Organization Theory, 12, pp Borgatti, S., Carley, K. & Krackhardt, D., (2006). On the robustness of centrality measures under conditions of imperfect data. Social Networks, 28, pp Brambilla, C. (2012). Miscarried Innovation? The Rise and Fall of Investment Banking in Italy, 1860s-1930s. Entreprises et Histoire, 67, pp Branston, R. (2001). A counterfactual price analysis of British electricity privatisation. Utilities Policy, 9, pp Carnevali, F. (2005). Europe s Advantage. Banks and Small Firms in Britain, France, Germany, and Italy since Oxford: Oxford University Press. Casson, M., (2009). The efficiency of the Victorian British railway network: a counterfactual analysis. Networks and Spatial Economics, 9, pp Cohen, J., and Federico, G. (2001). The Development of the Italian Economy, Cambridge: Cambridge University Press. Confalonieri, A. ( ). Banca ed industria in Italia , 3 vols. Milan: Banca Commerciale Italiana. Confalonieri, A. (1982). Banca e industria in Italia dalla crisi del 1907 all agosto 1914, 2 vols. Milan: Banca Commerciale Italiana. Confalonieri, A. (1992). Banche miste e grande industria in Italia , vol. I: Introduzione. L esperienza della Banca Commerciale e del Credito Italiano. Milan: Banca Commerciale Italiana. Confalonieri, A. (1997). Banche miste e grande industria in Italia , vol. II: I rapporti banca-industria. Milan: Banca Commerciale Italiana. Conti, G. (1999). Le banche e il finanziamento industriale, in Storia d Italia. Annali 15, ed. F. Amatori, D. Bigazzi, R. Giannetti and L. Segreto, Turin: Einaudi, pp Conti, G., and Ferri, G. (1997), Banche locali e sviluppo economico decentrato, in Storia del capitalismo italiano dal dopoguerra a oggi, ed. F. Barca, Rome: Donzelli, pp Cotula, F., De Cecco, M., and Toniolo, G. (2003). La Banca d Italia. Sintesi della ricerca storica Rome-Bari: Laterza. De Nooy, W., Mrvar, A., and Batagelj, V. (2011). Explanatory Social Network Analysis with Pajek. New York: Cambridge University Press. Fohlin, C. (1998). Fiduciari and firm liquidity constraint: the Italian experience with German-style universal banking, Explorations in Economic History, 35, Fohlin, C. (1999). Capital mobilisation and utilisation in latecomer economies: Germany and Italy compared, European Review of Economic History, 3,

19 Gerschenkron, A. (1962). Economic Backwardness in Historical Perspective. Cambridge MA: Cambridge University Press. Grifone, P. (1945). Il capitale finanziario in Italia. Turin: Einaudi. Hilferding, R. (1910). Das Finanzkapital. Eine Studie über die jungste Entwicklung des Kapitalismus. Berlin: Verlag J.H.W. Dietz (1947 reprint of the original edition). Jones, G., van Leeuwen, M.H.D, and Steve Broadberry, S. (2013). The future of economic, business and social history, Scandinavian Economic History Review, 60, La Francesca, S. (2004). Storia del sistema bancario italiano. Bologna: Il Mulino. La Porta, R., Lopez de Silanes, F., Shleifer, A., and R.W. Vishny, R.W. (1998). Law and Finance, The Journal of Political Economy, 106, La Porta, R., Lopez de Silanes, F., and Shleifer, A. (1999). Corporate Ownership around the World, The Journal of Finance, 54, La Porta, R., Lopez de Silanes, F., and Shleifer, A. (2008). The Economic Consequences of Legal Origins, Journal of Economic Literature, 46(2), Meroni, C. (2009). Il fascismo italiano Milan: Alpha Test. Mintz, B., and Schwartz, M. (1985). The Power Structure of American Business. Chicago: University of Chicago Press. Pino Pongolini, F. (1991). Sui fiduciari della Comit nelle società per azioni ( ), Rivista di storia economica, n.s., 8(1), pp Rinaldi, A., and Vasta, M. (2005). The structure of Italian capitalism, : New evidence using the interlocking directorates technique, Financial History Review, 12, pp Rinaldi, A., and Vasta, M. (2011). The Italian Corporate Network: , Paper presented at the EBHA 15th Annual Conference Business, Finance and the State in the Twentieth Century: European Comparisons in Historical Perspective. Crisis and Transformation, Athens, August Rinaldi, A., and Vasta, M. (2012). The Italian Corporate Network After the Golden Age ( ): From Centrality to Marginalization of State-Owned Enterprises. Enterprise & Society, 13, pp Scott, J. (1985). Theoretical framework and research design, in Networks of Corporate Power, eds. F.N. Stokman, R. Ziegler and J. Scott, Cambridge: Polity, pp Toniolo, G. (1980). L economia dell Italia fascista. Bari: Laterza. Upper, C. (2007). Using Counterfactual Simulations to Assess the Danger of Contagion in Interbank Markets BIS Working Paper No Vasta, M. (2006). Appendix, in Evolution of the Italian Enterprises in the 20th Century, eds. R. Giannetti and M. Vasta, Heidelberg-New-York: Physica Verlag (Springer), pp Vasta, M., and Baccini, A. (1997). Bank and Industry and Italy : New Evidence Using Interlocking Directorates Technique, Financial History Review, 4, pp Windolf, P. (2012). Corporate Networks in the 20th Century. Germany, United States, and France in Comparison, paper presented at the conference Corporate networks in the 20 th century, Lausanne, August Zamagni, V. (1993). The Economic History of Italy Recovery after Decline. Oxford: Clarendon Press. 18

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