Soil loss, firm performance, and financing structure: An empirical investigation of Italian agricultural firms

Regulators, companies, and financial players are increasingly focusing on adverse climate events and environmental risks. Using a novel integration of high-resolution geospatial and firm-level financial data, this study provides the first empirical evidence on how rainfall-induced soil loss affects the financial performance and capital structure of Italian agricultural firms. We find that unsustainable soil erosion is associated with significantly lower profitability, manifesting as a decrease of 1.20% in Return on Assets (ROA) and 2.10% in Return on Equity (ROE). Unsustainable levels of soil loss also impair the ability to access external financing, as firms located in these areas exhibit lower levels of external bank financing (-2.00%) and (-3.30%) supplier short-term debt and rely more on equity financing (+4.80%). We also find partial support for the view that unsustainable soil loss impairs a firm's credit risk profile, evidenced by a negative relationship with the interest coverage ratio (-4.69). This research is highly relevant to international studies because it offers a concrete financial framework for understanding the economic consequences of environmental degradation. By providing quantifiable data linking soil loss to a firm's financial health, this study can inform policymakers and regulators globally of the hidden risks in agricultural supply chains. The methodology and insights can be applied to other countries facing similar challenges, providing a basis for considering how sustainable land management practices can contribute to mitigating systemic risks and fostering greater resilience in the agricultural sector.