The results of our analysis can be explained as the joint effect of laws and politics on the Italian financial market. During the beginning of the cen- tury, Italian capitalism was characterized by a limited and indirect inter- vention of the government in the economy and in the stock market. The Great Depression forced the government to intervene on a much larger scale because the crisis led to the collapse of Italy’s three main investment banks. Since then, the government has maintained a direct role in the econ- omy by bailing out companies in trouble, as well as by controlling compa- nies, especially in capital-intensive sectors.
Direct intervention by the state as an entrepreneur partially replaced and crowded out the role of the private sector in the accumulation of capi- tal. Since the state took a direct and massive role in allocating capital, Italian legislators did not consider the improvement of investor protection important for Italy. This is at odds with the experience of countries such as the United States, where the government faced similar challenges to those of Italy but chose to intervene as a regulator of capital markets rather than as a substitute. In an environment with no regulatory reforms, and frequent direct intervention by the state, Italian stock market activity declined in the 1950s and 1960s to a level lower than that of the early twentieth century.
With low investor protection and underdeveloped capital markets, new entrepreneurs found it very expensive to go public. Conversely, incumbent groups thrived in the market by allying themselves with politicians. During the fascist regime, autarchy protected them from foreign imports. By the postwar period, family capitalism firmly controlled the Italian economy. Important families enjoyed both economic and political power, which was transmitted from generation to generation. New publicly traded family groups seldom emerged. When they did, it was always due to strong political connections.
In this environment the majority of Italian firms stayed away from the stock market, were closely held by the founders’ families, and operated on a relatively small scale in niche markets. Family-controlled pyramidal groups and state-controlled conglomerates dominated the stock market. Because poor investor protection made Italian stock market unattractive, investors preferred to invest in government bonds rather than in equities.
To finance the costs of its active role in the economy, the government increased taxation and public debt. Eventually, public debt soared out of control, and in the 1990s the government engaged in a sweeping privatiza- tion program in an effort to reduce this debt. The government coupled the sale of assets with substantial improvement of the legal protection for minority shareholders. These changes made going public more appealing...
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