Even if you can’t refuse this kind of offer, a new study finds you most definitely should. Intriguing new research from Bocconi University in Milan, Italy disputes the long-held belief that Mafia “connected” businesses do well financially and enjoy greater success.
According to these findings, the exact opposite is true. Businesses with ties to organized crime were found to have higher levels of debt, lower cash holdings, lower return on assets, and a 25.5% greater chance of shutting down altogether.
The state of business for the Mafia
Popular culture’s love affair with the Mafia, gold chains and tracksuits dates back decades. From 1972’s The Godfather to The Sopranos’ recent surge in popularity and relevancy over just the past year, it isn’t exactly breaking news that mobsters are viewed by millions as a kind of lovable anti-hero. Sure, they aren’t exactly moral, but they look damn cool counting money and collecting payments.
The non-stop parade of mob-related movies and TV shows in recent decades has led to many an ordinary joe fantasizing about what it would be like to “be connected.” Most of these daydreams include expensive cars, lavish dinners, and tailored suits. This research serves as a bucket of cold water for such aspirations, revealing the harsh reality of what happens when businesses get involved with gangsters.
“If the unintentional effect of the literature on the Mafia entrepreneurship has been to create a sort of mystique around the concept of the criminal businessmen, our results are definitely against such a mystique,” study authors say.
Using data provided by the Italian Internal Intelligence and Security Agency, the research team identified 1,840 firms with criminal connections based out of Italy’s Lombardy region. Located in Northern Italy, Lombardy is considered one of the original regions where organized crime emerged in the first place. Importantly, the Lombardy region also accounts for 25% of modern-day Italy’s GDP.
While investigating local businesses in that area, study authors looked out for company directors or shareholders being investigated for any number of Mafia-related crimes. Such infractions include false invoices, usury, and smuggling, just to name a few. For the purpose of the study, a company was considered connected starting from the time of the criminal director’s appointment.
That investigative process led to numerous noteworthy findings. To start, while it is true that many connected businesses enjoy high sales and low labor costs, those same firms also show a 15.6% lower return on assets in comparison to unconnected firms.
Researchers theorize this curious lower profitability is likely due to money laundering practices, which entails moving funds into and out of various cash businesses in order to better disguise criminal activity. More specifically, this is often accomplished using false, cost-inflating invoices that ultimately lower profitability.
Moreover, mob-connected firms have, on average, 8.4% more debt than their straight and narrow peers. Connected businesses will often suspiciously use more bank loans at far lower interest rates despite being less profitable on paper – indicating the loans themselves may be made up.
Firms in league with organized crime also have 5.9% lower cash holdings, suggesting such firms must make due with far less liquidity due to the “resource-draining” nature of their Mafia partnership. Researchers also report that connected businesses are usually able to sell their goods quickly, but only thanks to criminal methods such as coercion and bribery.
In summation, study authors conclude “we find that connected firms have lower profitability, even though they report higher sales and lower labor cost. Connected firms also have higher bank debt, report lower cash holdings, experience quicker operating cycles, and are more likely to file for bankruptcy.”
We were all told by a teacher, parent, or Saturday morning cartoon the old adage that “crime doesn’t pay.” This study serves as a reminder of that childhood lesson. Getting involved with organized crime may be financially beneficial in the very short-term, but it rarely works out long-term. Just ask old man Satriale.
The full study can be found here, published in The Accounting Review.