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Can Strong Creditors Inhibit Entrepreneurial Activity?
[Creditor rights and corporate risk-taking]

Author

Listed:
  • Nuri Ersahin
  • Rustom M Irani
  • Katherine Waldock

Abstract

We examine entrepreneurial activity following the staggered adoption of modern-day fraudulent transfer laws in the United States. These laws strengthen unsecured creditors’ rights and are particularly important for entrepreneurs whose personal assets commingle with the firm’s. Using administrative data from the U.S. Census Bureau, we document declines in startup entry—particularly among riskier entrants—and closures of existing firms after these laws pass. Firm financial data shows that entrepreneurs lower leverage by reducing demand for unsecured credit. Our results suggest that strong creditor protections can limit entrepreneurs’ appetite for risk, which may reduce churning along the extensive margin among the smallest firms in the economy.

Suggested Citation

  • Nuri Ersahin & Rustom M Irani & Katherine Waldock, 2021. "Can Strong Creditors Inhibit Entrepreneurial Activity? [Creditor rights and corporate risk-taking]," The Review of Financial Studies, Society for Financial Studies, vol. 34(4), pages 1661-1698.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:4:p:1661-1698.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa050
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    Cited by:

    1. Cumming, Douglas J. & Sewaid, Ahmed, 2021. "FinTech loans, self-employment, and financial performance," CFS Working Paper Series 667, Center for Financial Studies (CFS).

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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