How Does Personal Bankruptcy Law Affect Start-Ups?

37 Pages Posted: 23 Sep 2011 Last revised: 28 Sep 2016

Geraldo Cerqueiro

Catolica Lisbon School of Business and Economics

María Fabiana Penas

Universidad Torcuato Di Tella

Date Written: September 21, 2011

Abstract

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.

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

JEL Classification: G32, G33, K35, M13

Suggested Citation

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

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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