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Debtor Rights, Credit Supply, and Innovation

72 Pages Posted: 18 Apr 2013 Last revised: 18 Mar 2016

Geraldo Cerqueiro

Catolica Lisbon School of Business and Economics

Deepak Hegde

New York University (NYU) - Leonard N. Stern School of Business

María Fabiana Penas

Universidad Torcuato Di Tella

Robert Seamans

New York University (NYU) - Leonard N. Stern School of Business

Date Written: March 18, 2016

Abstract

Firms’ innovative activities can be sensitive to public policies that affect the availability of capital for risky projects. In this paper, we investigate the effects of regional and temporal variation in U.S. personal bankruptcy laws on firms’ innovative activities. We find bankruptcy laws that provide stronger debtor protection decrease the number of patents produced by small firms. Stronger debtor protection also decreases the average quality, and variance in quality, of firms’ patents. We find evidence that the negative effect of stronger debtor protection on experimentation and innovation may be due to the decreased availability of external finance in response to stronger debtor rights — an effect amplified in industries with a high dependence on external finance. Hence, while it is typically assumed that stronger debtor protection encourages innovation by reducing the cost of failure for innovators, we show that it can instead dampen innovative activities by tightening the availability of external finance to innovators.

Keywords: Debtor Protection, Credit Markets, Innovation, Patents, Personal Bankruptcy Law, Small Businesses

JEL Classification: G21, G33, K2, O3

Suggested Citation

Cerqueiro, Geraldo and Hegde, Deepak and Penas, María Fabiana and Seamans, Robert, Debtor Rights, Credit Supply, and Innovation (March 18, 2016). TILEC Discussion Paper No. 2014-011. Available at SSRN: https://ssrn.com/abstract=2246982 or http://dx.doi.org/10.2139/ssrn.2246982

Geraldo Cerqueiro

Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Deepak Hegde

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

María Fabiana Penas

Universidad Torcuato Di Tella ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

Robert Seamans (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

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