Does Debtor Protection Really Protect Debtors? Evidence from the Small Business Credit Market
Allen N. Berger
University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center
Catolica Lisbon School of Business and Economics
María Fabiana Penas
Tilburg University - CentER, EBC, and TILEC
AFA 2009 San Francisco Meetings Paper
EFA 2009 Bergen Meetings Paper
This paper analyzes how different levels of debtor protection across U.S. states affect small firms' access to credit, as well as the price and non-price terms of their loans. We use a measure of debtor protection that has its maximum value when the borrower's home equity is lower than the state homestead exemption (the debtor's home equity is fully protected), and is decreasing in the difference between the home equity and the homestead exemption (the amount that the creditor can seize). We find that the unlimited liability small businesses (sole proprietorships and most partnerships) have lower access to credit in states with more debtor-friendly bankruptcy laws. In addition, these businesses face harsher loan terms - they are more likely to pledge business collateral, have shorter maturities, pay higher rates, and borrow smaller amounts. For limited liability small businesses (corporations and limited liability partnerships), we also find a reduction in credit availability but of smaller magnitude, together with an increase in the loan rate, and decrease in loan amounts. Our results also suggest that the personal bankruptcy law especially affects firm owners with low home equity values.
Number of Pages in PDF File: 42
Keywords: Debtor protection, bankruptcy, small business, credit availability, agency problems
JEL Classification: G32, G33, K2, K35
Date posted: March 19, 2008 ; Last revised: March 27, 2014
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