VoxEU Column Industrial organisation

Having the Sopranos on board: Corporate governance and organised crime in Italy

Economic theory doesn’t provide a clear prediction on how a firm’s performance will be affected if some of its board members have ties to organised crime. This column explores this issue using a unique Italian dataset that includes confidential information about ongoing investigations. Seven percent of firms are found to have at least one director under investigation, and these firms demonstrate, on average, lower levels of cash holdings and worse profitability compared with ‘untainted’ firms.

What are the corporate consequences of having board directors connected to organised crime? The economic consequences of organised crime go beyond the obvious social implications – they extend to the entire global economy. The presence of criminal organisations increases the riskiness and uncertainty of the business environment, ultimately lowering the growth potential of the economy (Pinotti 2015a, Ganau and Rodriguez-Pose 2017). The private sector faces risk – firms expect a business environment with fair, clear, and transparent tax and trade policies, but they have strong incentives to engage in illegal behaviour when they believe their competitors are receiving unfair advantages (World Bank 2016). Thus a natural question to ask is whether and to what extent the private sector is polluted by organised crime? And, more importantly, does the presence of criminal organisations generate economic consequences on firm operations and value?

In recent work, we contribute to the literatures on both corporate governance and organised crime by assessing the economic consequences when firms are ‘tainted in the board room’ (Bianchi et al. 2017). Specifically, we test the influence of directors whose criminal records display potential involvement with criminal organisations on firm operations and firm value.

Beyond the relevance of the issue, the empirical literature on crime has largely neglected to examine the micro-level economic consequences of organised criminal organisations. Among the exceptions, a few studies (Bandiera 2003, Buonanno et al. 2015, Dimico et al. 2017) examine the historical origins of the Sicilian Mafia. Moreover, Mastrobuoni (2015) analyses the importance of criminal connections inside an Italian-American criminal organisation (i.e. Cosa Nostra). Dell (2015) estimates the effects of law enforcement on trafficking networks in Mexico. Pinotti (2015b) estimates the economic cost of organised crime in two regions of southern Italy. Finally, Pinotti (2015a) examines the cross-country correlation between organised crime and measures of institutional quality.

Surprisingly, the finance and economics literatures are largely silent about the mechanisms through which criminal organisations taint corporations in pursuing their illegal goals. The literature on crime has explored the relationships between organised crime, finance, and the legal sector, shedding light on money laundering phenomena. Only in recent times has economic analysis focused more broadly on the financial aspects of illegal activities. As more and more attention has been directed towards money laundering, there has been a growing awareness of the need to examine any law violations that generate revenue (Masciandaro 1999, Argentiero et al. 2008, Dalla Pellegrina and Masciandaro 2009, Ferwenda 2009, Levi and Reuter 2009, Ardizzi et al. 2014).

Polluted corporate governance in Italy

In general, the presence of board members who are tainted by organised crime represents an internal risk which can affect firm financial policies differently. Corporate performance can be influenced by both downside and upside risks. On the one hand, when the corporation is used to launder money, firms can benefit from the presence of tainted directors if they can trade proceeds from illegal activities for business opportunities. More generally, the presence of tainted directors makes a firm more profitable due to the illegal advantages the criminal organisation affiliated with the director is able to generate. At the same time, the need to reduce the probability of detection can influence the financial policies of the firm.

On the other hand, the presence of tainted directors can worsen firm profitability through their illegal behaviour. Further, from a financial perspective, firms might manage cash holdings downward in an attempt to lower the risk of being targeted by criminal organisations.

The trade-off between the costs and benefits of having tainted directors on board suggests that it is an empirical question as to whether tainted directors enhance or harm a firm’s performance. In our research, we examine a large sample of Italian private companies to examine the effect of tainted directors on firm operations and firm value. Italy provides a unique environment to study organised crime-related issues. First, Italy is arguably the cradle of the first criminal organisations (Paoli 2004). Second, Italy was the first country to target mafia organisations through specific legislation (Law 646/82). Third, a unique feature of our work is the access we have to a unique and strictly confidential database which reports the results of the investigations of police and military forces (‘System of Investigation’, or ‘SoI’). This database is managed by the Italian Internal Intelligence and Security Agency (AISI). The corporation headquarters are in Lombardy, the richest Italian region, where a strong presence of criminal organisations is reported – see recent studies (e.g. Varese 2006), as well as anecdotal evidence from the national press and criminal courts’ judgements. Our final sample is made of 16,382 unique firms (108,332 firm-year observations) for the period 2006-2013.

To create a measure of the costs and benefits of the presence of tainted directors, we use the information contained in the SoI database and define a director as tainted if she is under investigation by the police authorities for a potential crime falling under the umbrella of an organised crime type of offense. As such, we define as tainted those firms where at least one board member is tainted by organised crime, under the assumption that such members are able to influence the firm’s activities from the inside. An unquestionable advantage of our approach is the fact that individuals are ‘under investigation’, making this more than an ex post analysis – the tainted individuals do not know that they are in the spotlight. We follow the finance literature to operationalise firm operation and firm value with cash holdings and firm profitability, respectively. Our findings are robust to controls of other determinants of cash holdings and firm profitability, including firm financial and corporate governance characteristics. On top of that we use two alternative approaches to address and fix endogeneity issues.

Empirically, the applied approach takes its cue from recent finance literature (Fisman and Miguel 2007, Davidson et al. 2015, Mironov 2015) that examines the consequences of top executives ‘off the job’ behaviour on firm performance.

Our findings

The results are intriguing. In our sample, about 7% of firms have at least one tainted director on board, which suggests criminal organisations pollute the private sector in an economically meaningful way. Our analysis shows that these firms have lower average levels of cash holdings and are less profitable than firms without tainted directors on board.

We offer two interpretations of these core findings.

  • One possibility is that firms use financial policies to reduce expropriation risk, potentially fostered by tainted directors.
  • Another possibility is that the firms are completely captured by such directors, who use the corporations to launder money and managing cash holdings with the goal of minimising risk of detection.

Further to this, our findings also suggest that tainted directors’ presence worsens firm profitability.

We make at least four contributions. First, our work is a first step towards bridging the gap between the corporate governance literature and the emerging field examining the economic and financial consequences of organised crime. Second, we contribute to the literatures examining white-collar crimes and the consequences of top executives’ off-the-job behaviour on firm performance. Third, we are the first to provide empirical evidence that the existence of organised crime can taint firms in the private sector. Finally, our empirical analysis can likely inform both politicians and regulators in their ongoing attempts to prevent the proliferation of criminal organisations in the legal economy.


Ardizzi G, C Petraglia, M Piacenza, F Schneider, and G Turati. (2014), “Money laundering as a crime in the financial sector: A new approach to quantitative assessment, with an application to Italy”, Journal of Money, Credit and Banking 46(8): 1555–1590.

Argentiero, A, M Bagella and F Busato (2008), “Money laundering in a two sector model: Using theory for measurement”, European Journal of Law and Economics 26(3): 341–59.

Bandiera, O (2003), “Land reform, the market for protection, and the origins of the Sicilian Mafia: Theory and evidence”, Journal of Law, Economics, and Organization 19(1): 218–244.

Bianchi, P A, A Marra, D Masciandaro and N Pecchiari (2017), “Is it worth having the Sopranos on board? Corporate governance pollution and organized crime: The case of Italy”, Bocconi University, Baffi Carefin Working Paper Series.

Buonanno, P, R Durante, G Prarolo and P Vanin (2015), “Poor institutions, rich mines: Resource curse in the origins of the Sicilian Mafia”, The Economic Journal 125(586): F175–F202.

Dalla Pellegrina, L and D Masciandaro (2009), “The risk-based approach in the new European anti-money laundering legislation: A law and economics view”, Review of Law and Economics 5(2): 931-952.

Davidson, R, A Dey and A Smith (2015), “Executives' ‘off-the-job’ behavior, corporate culture, and financial reporting risk”, Journal of Financial Economics 117(1): 5–28.

Dell, M (2015) “Trafficking networks and the Mexican drug war”, American Economic Review 105(6): 1738–1779.

Dimico, A, A Isopi and O Olsson (2017), “Origins of the Sicilian Mafia: The market for lemons”, The Journal of Economic History, forthcoming.

Ferwenda, J (2009), “The economics of crime and money laundering: Does anti-money laundering policy reduce crime?”, Review of Law & Economics 5(2): 903-929.

Fisman, R and E Miguel (2007), “Corruption, norms, and legal enforcement: Evidence from diplomatic parking tickets”, The Journal of Political Economy 115(6): 1020–1048.

Ganau, R and A Rodriguez-Pose (2017), “Smaller firms suffer far more from organized, mafia-style crime”,, 17 August.

Levi, M and P Reuter (2009), “Money Laundering”, in M Tonry (ed), Handbook on Crime and Public Policy, Oxford University Press, New York.

Masciandaro, D (1999), “Money laundering: The economics of regulation”, European Journal of Law and Economics 7(3): 225-240.

Mastrobuoni, G (2015), “The value of connections: Evidence from the Italian‐American mafia”, The Economic Journal 125(586): F256–F288.

Mironov, M (2015), “Should one hire a corrupt CEO in a corrupt country?”, Journal of Financial Economics 117(1): 29–42.

Pinotti, P (2015a), “The causes and consequences of organized crime: Preliminary evidence across countries”, The Economic Journal 125(586): F158–F174.

Pinotti, P (2015b), “The economic costs of organized crime: Evidence from Southern Italy”, The Economic Journal 125(586): F203–F232.

Varese, F (2006), “How mafias migrate: The case of the Ndrangheta in Northern Italy”, Law & Society Review 40(2): 411–444.

World Bank (2016), Illicit Financial Flows.

2,310 Reads