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

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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