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Does debtor protection really protect debtors? Evidence from the small business credit market

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Author Info

  • Berger, Allen N.
  • Cerqueiro, Geraldo
  • Penas, María F.

Abstract

This paper analyzes how different levels of debtor protection across US states affect small firms' access to credit, as well as the price and non-price terms of their loans. We use an individual-specific measure of debtor protection that has its maximum value when the borrower's home equity is lower than the state homestead exemption (the debtor's home equity is fully protected), and is decreasing in the difference between the home equity and the homestead exemption (the amount that the creditor can seize). We find that unlimited liability small businesses have lower access to credit in states with more debtor-friendly bankruptcy laws. In addition, these businesses face tighter loan terms - they are more likely to pledge business collateral, have shorter maturities, and borrow smaller amounts. For limited liability small businesses, we also find a reduction in credit availability, but of smaller magnitude, together with an increase in the loan rate.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 7 (July)
Pages: 1843-1857

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:7:p:1843-1857

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Debtor protection Bankruptcy Small business Credit availability Agency problems;

References

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Citations

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Cited by:
  1. Cerqueiro, G.M. & Penas, M.F., 2011. "How Does Personal Bankruptcy Law Affect Start-ups?," Discussion Paper 2011-106, Tilburg University, Center for Economic Research.
  2. Corradin, Stefano & Gropp, Reint & Huizinga, Harry & Laeven, Luc, 2013. "Who invests in home equity to exempt wealth from bankruptcy?," SAFE Working Paper Series 21, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  3. P. Arca & G. Atzeni & L. Deidda, 2013. "Economics of bankruptcy exemption: Signaling value of collateral, cost of credit and access to credit," Working Paper CRENoS 201302, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  4. Elmas Yaldiz Hanedar & Eleonora Broccardo & Flavio Bazzana, 2012. "Collateral Requirements of SMEs:The Evidence from Less–Developed Countries," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 12111, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".

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