Abstract

http://ssrn.com/abstract=233248
 
 

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Bankruptcy and Small Firms' Access to Credit


Jeremy Berkowitz


University of Houston - Department of Finance

Michelle J. White


University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

June 2000

Michigan Law and Economics Working Paper No. 00-005

Abstract:     
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

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Date posted: June 21, 2000  

Suggested Citation

Berkowitz, Jeremy and White, Michelle J., Bankruptcy and Small Firms' Access to Credit (June 2000). Michigan Law and Economics Working Paper No. 00-005. Available at SSRN: http://ssrn.com/abstract=233248 or http://dx.doi.org/10.2139/ssrn.233248

Contact Information

Jeremy Berkowitz (Contact Author)
University of Houston - Department of Finance ( email )
Houston, TX 77204
United States
Michelle J. White
University of California, San Diego (UCSD) - Department of Economics ( email )
9500 Gilman Drive
La Jolla, CA 92093-0508
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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