Ethical businesses in an ethical world: does the adoption of the Italian “legality rating” affect firms’ insolvency risk?

Purpose In recent years, companies have increasingly focused their attention on new ways of regulating sustainable business activities and tools. This has led to the emergence of a “new sensitivity” regarding Corporate Social Responsibility (CSR) issues. Companies are therefore called to identify new strategies to improve their competitive advantage, to improve their financial performance and to differentiate themselves from competitors. To adapt to the changing legislation about CSR, Italy, in 2012, adopted the “legality rating” into its regulatory system, a rewarding tool for ethically virtuous companies. Taking into account the already present literature on the subject, and using discriminant analysis, the study aims to analyze the impact of this CSR-related tool on the bankruptcy risk of a sample of companies operating in the Italian service sector. Methodology The study, of an exploratory nature, uses multiple discriminant analysis to examine the relationship between "legality rating" and firms' bankruptcy risk. In this regard, research considersthe Z'-Score and Z''-Score formulas because sample companies are listed and unlisted, and to be aware of which of these two models is more capable of grasping the situation of the Italian companies with "legality rating" (later also referred to as "LR"). 2 Findings Even in presence of an ever hostility of the corporate world towards non-financial issues, the study shows that “legality rating” determines a reduction, over the years, of the bankruptcy risk for companies that voluntarily adopted it. Results also suggest that the ethical commitment of a company can positively influence its financial performance. Research limitations/implications The LR could be also used as a "ram" by companies, to operate within the bounds of legality while acting in an unethical, and sometimes unsustainable, way. Main limitations regard the italian low maturity about CSR issues and consequently the scarce relevance of the data provided by Agcm. Companies with “legality rating” could behave in an unethical manner while maintaining their “virtuous” status. This can invalidate the work’s results. However, this work lays the foundations for future research on the subject, offering food for thought for management and ideas for the academic world, but above all paves the way for new research aimed at deepening the often-unclear link between finance and CSR. Originality/Value The paper contributes to the expansion of the literature on the theme, considering the specific case of the Italian service sector, where a high density of “rated” companies can be traced. In Italy, research on the theme is still in its infancy, although the “legality rating” tool was introduced in 2012. The results and considerations of this work can offer new points of view and new ideas that are also useful for comparing the results of different CSR-related tool at European level.