An Empirical Examination of 'Barrier to Exit': How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level?

Babson College Entrepreneurship Research Conference (BCERC) 2007

Frontiers of Entrepreneurship Research 2007

15 Pages Posted: 6 Dec 2007  

Seung-Hyun Lee

University of Texas at Dallas - Naveen Jindal School of Management

Yasuhiro Yamakawa

Babson College - Arthur M. Blank Center for Entrepreneurship

Mike W. Peng

University of Texas at Dallas - Naveen Jindal School of Management

Abstract

Does an entrepreneur-friendly bankruptcy law encourage more entrepreneurship development at a societal level? How does bankruptcy law affect entrepreneurship development around the world? Drawing on a real options perspective, we argue that if bankrupt entrepreneurs are excessively punished for failure, they may pass potentially high-return but inherently high-risk opportunities. Amassing a longitudinal, cross-country data base from 35 countries spanning ten years, we find that a lenient, entrepreneur-friendly bankruptcy law encourages entrepreneurs to take risks and thus let entrepreneurship prosper. Components of an entrepreneur-friendly bankruptcy law are: (1) the availability of a reorganization bankruptcy option, (2) the time spent on bankruptcy procedure, (3) the cost of bankruptcy procedure, (4) the opportunity to have a fresh start in liquidation bankruptcy, (5) the opportunity to have an automatic stay of assets, (6) the opportunity for managers to remain on the job after filing for bankruptcy, and (7) the protection of creditors at the time of bankruptcy.

Keywords: Entrepreneurship

JEL Classification: M13

Suggested Citation

Lee, Seung-Hyun and Yamakawa, Yasuhiro and Peng, Mike W., An Empirical Examination of 'Barrier to Exit': How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level?. Babson College Entrepreneurship Research Conference (BCERC) 2007; Frontiers of Entrepreneurship Research 2007. Available at SSRN: https://ssrn.com/abstract=1059661 or http://dx.doi.org/10.2139/ssrn.1059661

Seung-Hyun Lee (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Yasuhiro Yamakawa

Babson College - Arthur M. Blank Center for Entrepreneurship ( email )

231 Forest Street
Babson Park, MA 02457-0310
United States

Mike W. Peng

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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