Can Strong Creditors Inhibit Entrepreneurial Activity?

51 Pages Posted: 12 Jul 2016 Last revised: 30 Jan 2019

See all articles by Nuri Ersahin

Nuri Ersahin

Eli Broad College of Business - 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 20, 2019

Abstract

We examine startup entry and exit 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, churning among entrants, and closures of existing firms after these laws pass. Firm financial data shows that entrepreneurs lower leverage by reducing unsecured credit. Our results suggest that excessive creditor rights can reduce entrepreneurs’ appetite for risk, thereby slowing down the extensive margin process of reallocating resources from failing to new businesses.

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 20, 2019). Available at SSRN: https://ssrn.com/abstract=2807420 or http://dx.doi.org/10.2139/ssrn.2807420

Nuri Ersahin

Eli Broad College of Business - Department of Finance ( email )

645 N Shaw Lane
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://business.illinois.edu/rirani/

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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