The Performance of Zero-Leverage Firms During the COVID-19 Crisis: Evidence from Italian SMEs

This thesis analyses the role of capital structure in shaping the resilience of Italian SMEs during the COVID-19 crisis, starting from the main theories on leverage and progressively focusing on the zero-leverage puzzle. After reviewing classical frameworks such as Modigliani-Miller, the trade-off and pecking-order theories, the study examines why many firms persistently avoid debt and how financial flexibility and financial constraints offer competing explanations. The analysis then concentrates on the Italian SME context, characterised by strong reliance on bank lending and heterogeneous access to credit. The empirical section uses a large dataset of more than 50,000 SMEs to compare the crisis performance of zero-leverage and leveraged firms. The results show that debt-free firms experienced a sharper decline in ROA in 2020, indicating weaker operational resilience, while their ROE fell less than that of leveraged peers, as the absence of financial leverage mitigated the amplification of losses. Additional evidence from almost-zero-leverage firms and from those that raised debt during the crisis suggests that many SMEs were debt-free due to constraints rather than deliberate financial flexibility. Overall, the thesis provides new insights into how capital structure decisions influence SME performance in periods of extreme economic stress.