37 Pages Posted: 23 Sep 2011 Last revised: 28 Sep 2016
Date Written: September 21, 2011
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: 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