Judicial Uncertainty and the Cost of Debt: Evidence from Italian SMEs.

This study investigates the relationship between judicial quality and firms’ cost of debt in the Italian SME sector. Drawing on firm-level data from 2015 to 2019, we estimate interest expense ratios for manufacturing SMEs and assess how they are influenced by the efficiency of local courts in enforcing credit rights. Controlling firm-level risk factors — including financial health, innovation activity, and internationalization — we find a robust positive relation between judicial inefficiency and higher borrowing costs. Specifically, a 10% increase in judicial delay is associated with an increase of approximately 0.024 percentage points in the interest expense ratio. Further analysis reveals that the effect varies across debt maturity structures, with longer-term financing mitigating the impact of judicial inefficiency. Overall, these findings highlight the role of institutional quality in shaping firms’ access to external finance and underscore the importance of judicial efficiency for financial market outcomes.