Debtor Protection and Small Business Credit

71 Pages Posted: 24 Aug 2016

See all articles by John Hackney

John Hackney

University of South Carolina - Department of Finance

Date Written: June 11, 2016

Abstract

In this paper I ask whether and how debtor protection affects aggregate small business credit quantity. Using comprehensive data on the number and amount of small business loans granted by commercial banks, and employing a robust difference-in-difference empirical design utilizing staggered shocks to personal bankruptcy exemptions, I find that increases in debtor protection increase the equilibrium quantity of small business credit in local regions. This finding is statistically significant and robust, despite competing demand and supply effects. I find that an average change in the homestead exemption results in a 1.1% increase in the number of small business loans in a local area (census tract), and a 2.5% increase in the total volume. The increase in quantity is concentrated in areas with presumably higher risk aversion and higher wealth, as predicted by the wealth insurance and collateral channels, respectively, and where local banks are better able to determine borrower type. These findings add depth to previous literature on debtor protection and small business financing that finds a tightening of credit terms, and suggest a greater role of the wealth insurance properties of personal bankruptcy law in determining aggregate small business credit quantity.

Keywords: Law and Finance, Creditor Protection, Bankruptcy, Small Business, Banking

JEL Classification: K35, G33, G21, L26

Suggested Citation

Hackney, John, Debtor Protection and Small Business Credit (June 11, 2016). Available at SSRN: https://ssrn.com/abstract=2813669 or http://dx.doi.org/10.2139/ssrn.2813669

John Hackney (Contact Author)

University of South Carolina - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

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