Safeguarding Ethics, Sustaining Success: The Role of Italy’s Legality Rating in Mitigating Firms’ Insolvency Risk

This study explores the impact of Corporate Social Responsibility (CSR) initiatives, particularly the legality rating introduced by the Italian government in 2012, on insolvency risk and financial performance in the Italian service sector. Using discriminant analysis, it evaluates how this CSR-related tool influence businesses’ financial stability amidst evolving legislation. The research employs Altman’s Z′-Score and Z″-Score formulas to analyze a diverse sample of listed and unlisted Italian service companies. Results suggest that companies embracing the legality rating experience decreased insolvency risk over time, correlating with enhanced financial performance. However, the study also highlights potential misuse of the rating, where companies maintain an “ethical status” while engaging in unethical practices. Despite limitations stemming from Italy’s underdeveloped CSR landscape, the research offers managerial insights and prompts further inquiry into the nuanced relationship between insolvency and CSR. Finally, this paper contributes fresh insights to the emerging CSR research in Italy, particularly within the service sector, providing valuable groundwork for comparative analysis across Europe.