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How Does Personal Bankruptcy Law Affect Start-ups?

Author

Listed:
  • Cerqueiro, G.M.

    (Tilburg University, Center For Economic Research)

  • 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.

Suggested Citation

  • 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.
  • Handle: RePEc:tiu:tiucen:c3206713-ecc5-47f6-94b0-7443e0891581
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    References listed on IDEAS

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    More about this item

    Keywords

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

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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