Can Strong Creditors Inhibit Entrepreneurial Activity?

48 Pages Posted: 12 Jul 2016 Last revised: 26 Jan 2020

See all articles by Nuri Ersahin

Nuri Ersahin

Michigan State University-Department of Finance

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance; Centre for Economic Policy Research (CEPR)

Katherine Waldock

Georgetown University McDonough School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 2020

Abstract

We examine entrepreneurial activity following the staggered adoption of modern-day fraudulent transfer laws in the United States. These laws strengthen unsecured creditors’ rights and are particularly important for entrepreneurs whose personal assets commingle with the firm’s. Using administrative data from the U.S. Census Bureau, we document declines in startup entry—particularly among riskier entrants—and closures of existing firms after these laws pass. Firm financial data shows that entrepreneurs lower leverage by reducing demand for unsecured credit. Our results suggest that strong creditor protections can limit entrepreneurs’ appetite for risk, which may reduce churning along the extensive margin among the smallest firms in the economy.

Keywords: Creditor rights; bankruptcy; entrepreneurship; startups; reallocation; churn

JEL Classification: G21, G33, K22, L26, M13

Suggested Citation

Ersahin, Nuri and Irani, Rustom M. and Waldock, Katherine, Can Strong Creditors Inhibit Entrepreneurial Activity? (January 24, 2020). Available at SSRN: https://ssrn.com/abstract=2807420 or http://dx.doi.org/10.2139/ssrn.2807420

Nuri Ersahin

Michigan State University-Department of Finance ( email )

East Lansing, MI 48824
United States
8478686532 (Phone)

HOME PAGE: http://sites.google.com/site/nuriersahin/

Rustom M. Irani (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

College of Business
1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://rirani.web.illinois.edu

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Katherine Waldock

Georgetown University McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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