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http://ssrn.com/abstract=1101309
 
 

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Does Debtor Protection Really Protect Debtors? Evidence from the Small Business Credit Market


Allen N. Berger


University of South Carolina - Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Geraldo Cerqueiro


Catolica Lisbon School of Business and Economics

María Fabiana Penas


Tilburg University - CentER, EBC, and TILEC

December 2008

AFA 2009 San Francisco Meetings Paper
EFA 2009 Bergen Meetings Paper

Abstract:     
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

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Date posted: March 19, 2008 ; Last revised: March 27, 2014

Suggested Citation

Berger, Allen N. and Cerqueiro, Geraldo and Penas, María Fabiana, Does Debtor Protection Really Protect Debtors? Evidence from the Small Business Credit Market (December 2008). AFA 2009 San Francisco Meetings Paper; EFA 2009 Bergen Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1101309 or http://dx.doi.org/10.2139/ssrn.1101309

Contact Information

Allen N. Berger
University of South Carolina - Moore School of Business ( email )
1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)
Wharton Financial Institutions Center
Philadelphia, PA 19104-6367
United States
European Banking Center
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Geraldo Cerqueiro
Catolica Lisbon School of Business and Economics ( email )
palma de Cima
Lisbon, 1649-023
Portugal
María Fabiana Penas (Contact Author)
Tilburg University - CentER, EBC, and TILEC ( email )
P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands
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