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How Does Personal Bankruptcy Law Affect Start-Ups?

Geraldo Cerqueiro

Universidade Católica Portuguesa

María Fabiana Penas

Tilburg University - CentER, EBC, and TILEC

September 21, 2011

We analyze the effect of changes in U.S. state personal exemptions on the financing structure and performance of a representative sample of start-ups. An increase in the amount of borrower’s personal wealth protected in bankruptcy reduces the availability of bank credit to all start-ups. Owners of unlimited liability businesses, who benefit from the increase in wealth insurance, offset the reduction in bank credit by investing more money in the firm. We find no such response for start-ups whose entrepreneurs’ personal wealth is already protected by limited liability. Consequently, corporations experience lower growth rates and higher failure rates, while proprietorships performance is not negatively affected.

Number of Pages in PDF File: 37

Keywords: Debtor protection, bankruptcy, start-ups, credit availability, agency problems

JEL Classification: G32, G33, K35, M13

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Date posted: September 23, 2011 ; Last revised: April 23, 2013

Suggested Citation

Cerqueiro, Geraldo and Penas, María Fabiana, How Does Personal Bankruptcy Law Affect Start-Ups? (September 21, 2011). Available at SSRN: http://ssrn.com/abstract=1931723 or http://dx.doi.org/10.2139/ssrn.1931723

Contact Information

Geraldo Cerqueiro
Universidade Católica Portuguesa ( email )
Palma de Cima
Lisbon, 1649-023
María Fabiana Penas (Contact Author)
Tilburg University - CentER, EBC, and TILEC ( email )
P.O. Box 90153
Tilburg, DC 5000 LE
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