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Prospect theory and the effects of bankruptcy laws on entrepreneurial aspirations

Author

Listed:
  • Saul Estrin

    (Houghton Street)

  • Tomasz Mickiewicz

    (Aston University)

  • Anna Rebmann

    (Aston University)

Abstract

We apply prospect theory to explain how personal and corporate bankruptcy laws affect risk perceptions of entrepreneurs at time of entry and therefore their growth ambitions. Previous theories have reached ambiguous conclusions as to whether countries with more debtor-friendly bankruptcy laws (i.e. laws that are more forgiving towards debtors in bankruptcy proceedings) are likely to have more entrepreneurs, or whether, creditor-friendly regimes have positive effects on new ventures via enhanced incentives for the supply of credit to entrepreneurs. Responding to this ambiguity, we apply prospect theory to propose that entrepreneurs do not attach the same significance to different elements of bankruptcy codes—and to explain which aspects of debtor-friendly bankruptcy laws matter more to entrepreneurs. Based on this, we derive and confirm hypotheses about the impact of aspects of bankruptcy codes on entrepreneurial activity using the Global Entrepreneurship Monitor combined with data on both personal and corporate bankruptcy regulations for 15 developed OECD countries. We use multilevel random coefficient logistic regressions to take account of the hierarchical nature of the data (country and individual levels). Because entrepreneurs and creditors are sensitive to different elements of the codes, there is scope for optimisation of the legal design of bankruptcy law to achieve both an adequate supply of credit and to encourage high-ambition entrepreneurship.

Suggested Citation

  • Saul Estrin & Tomasz Mickiewicz & Anna Rebmann, 2017. "Prospect theory and the effects of bankruptcy laws on entrepreneurial aspirations," Small Business Economics, Springer, vol. 48(4), pages 977-997, April.
  • Handle: RePEc:kap:sbusec:v:48:y:2017:i:4:d:10.1007_s11187-016-9810-1
    DOI: 10.1007/s11187-016-9810-1
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    Cited by:

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    2. Régis Blazy & Nirjhar Nigam, 2019. "Corporate insolvency procedures in England: the uneasy case for liquidations," European Journal of Law and Economics, Springer, vol. 47(1), pages 89-123, February.
    3. Kovács, Olivér, 2020. "Gazellák az iparpolitika tükrében, I [Gazelles and industrial policy, Part 1]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 54-87.
    4. Lucio Fuentelsaz & Consuelo González & Juan P. Maícas, 2021. "High-growth aspiration entrepreneurship and exit: the contingent role of market-supporting institutions," Small Business Economics, Springer, vol. 57(1), pages 473-492, June.
    5. Alessandro Melcarne & Giovanni B. Ramello, 2020. "Bankruptcy delay and firms’ dynamics," Small Business Economics, Springer, vol. 54(2), pages 405-419, February.
    6. Richard A. Martina, 2020. "Toward a theory of affordable loss," Small Business Economics, Springer, vol. 54(3), pages 751-774, March.

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    More about this item

    Keywords

    Entrepreneurship; High-aspiration entrepreneurship; Bankruptcy; Global entrepreneurship monitor;
    All these keywords.

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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