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

42 Pages Posted: 19 Mar 2008 Last revised: 27 Mar 2014

Allen N. Berger

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

Geraldo Cerqueiro

Catolica Lisbon School of Business and Economics

María Fabiana Penas

Universidad Torcuato Di Tella

Date Written: December 2008

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.

Keywords: Debtor protection, bankruptcy, small business, credit availability, agency problems

JEL Classification: G32, G33, K2, K35

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: https://ssrn.com/abstract=1101309 or http://dx.doi.org/10.2139/ssrn.1101309

Allen N. Berger

University of South Carolina - Darla 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)

Universidad Torcuato Di Tella ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

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