Strategic Bunching and Firm Behavior Around Italian Audit Thresholds

This thesis examines whether Italian private limited-liability companies (S.r.l.s) show behavior consistent with strategic bunching around statutory audit thresholds and whether firms that show possible bunching characteristics expand differently after the reform. Before the reform, under Article 2477 of the Italian Civil Code, firms exceeding at least two of three limits (€4.4 million in assets, €8.8 million in revenue, and 50 employees) for two consecutive years, would became subject to the size-based audit requirement. The 2019 reform lowered the limits to €4 million in assets, €4 million in revenues, and 20 employees and made passing any one of them for two consecutive years sufficient for triggering mandate. After implementation delays, 2022 became the first possible trigger year and 2023 the first audit-exposure year. Using 7,702,034 firm-year observations from 2016-2023, the thesis documents that at the €4 million asset threshold, Estimated excess mass below the final €4 million asset threshold is small and statistically imprecise in the clean 2016–2018 baseline, becomes more pronounced during the reform period, and peaks at 14.74 percent in 2022. Revenue does not show the same sustained pattern, while the employee margin shows a deficit rather than positive bunching. At firm level, 5,576 firms that crossed a new threshold in 2021 but were below all three in 2022 are compared with 89,164 firms that crossed a threshold in both years. The first group shows lower net investment and cash conversion, higher depreciation and accrual intensity, more receivables, and longer collection periods. Later, a selected part of this profile, together with repeated position below the old €4.4 million asset threshold, is used to identify behavior-predicted bunchers before the reform. Among these firms, 807 are classified as “released” with their high behavioral signal disappearing and them crossing at least one new threshold during 2022-2023. Compared with 3,878 “just-below normal” firms, the 2022-2023 estimates show 20.87 percent higher revenue, 6.10 percent higher employment, 11.16 percent higher value added, and 10.33 percent higher assets, while productivity does not increase significantly. Some scale differences already appear in 2021, consistent with a gradual response. The results are consistent with threshold-related restraint, but the observational design and unobserved managerial intention do not allow a fully causal or intentional interpretation.