Bankruptcy and Small Firms' Access to Credit
University of Houston - Department of Finance
Michelle J. White
University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)
Michigan Law and Economics Working Paper No. 00-005
In this paper, we investigate how personal bankruptcy law affects small firms' access to credit. When a firm is unincorporated, its debts are personal liabilities of the firm's owner, so that lending to the firm is legally equivalent to lending to its owner. If the firm fails, the owner has an incentive to file for personal bankruptcy, since the firm's debts will be discharged and the owner is only obliged to use assets above an exemption level to repay creditors. The higher the exemption level, the greater is the incentive to file for bankruptcy. We show that supply of credit falls and demand rises when non-corporate firms are located in states with higher bankruptcy exemptions. We test the model and find that small firms are 25% more likely to be denied credit if they are located in states with unlimited rather than low homestead exemptions.
Number of Pages in PDF File: 31
JEL Classification: G31, G32, G33, K2, E43
Date posted: June 21, 2000
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