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How Does Personal Bankruptcy Law Affect Start-ups?

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  • Cerqueiro, G.M.
  • Penas, M.F.

    (Tilburg University, Center for Economic Research)

Abstract

We analyze the effect of changes in U.S. state personal exemptions on the financing structure and performance of a representative sample of start-ups. An increase in the amount of borrower’s personal wealth protected in bankruptcy reduces the availability of bank credit to all start-ups. Owners of unlimited liability businesses, who benefit from the increase in wealth insurance, offset the reduction in bank credit by investing more money in the firm. We find no such response for start-ups whose entrepreneurs’ personal wealth is already protected by limited liability. Consequently, corporations experience lower growth rates and higher failure rates, while proprietorships performance is not negatively affected.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-106.

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Date of creation: 2011
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Handle: RePEc:dgr:kubcen:2011106

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Web page: http://center.uvt.nl

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Keywords: Debtor protection; bankruptcy; start-ups; credit availability; agency problems;

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