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Personal Bankruptcy Law and Innovation around the World

Author

Listed:
  • Douglas Cumming
  • Randall Morck
  • Zhao Rong
  • Minjie Zhang

Abstract

Because corporate limited liability protects founder’s personal assets, creditors often require founders of new, small and risky firms to contract around limited liability by pledging their personal assets as collateral for loans to their firms. This makes personal bankruptcy law (PBL) relevant to corporate finance. We find that pro-debtor PBL reforms increase the number of patents filed, citations to those patents, and début patents by firms with no previous patents. These reforms also redistribute innovation across industries in closer alignment to its distribution in the U.S., which we take to approximate industry innovative potential. These effects are driven by firms without histories of high-intensity patenting, and are damped in countries that impose minimum capital requirements on new firms. Firms with largescale legacy technology may avoid radical innovations that devalue that technology. Consequently, new, initially small and risky firms often develop the disruptive innovations that contribute most to economic growth. Consistent with this, we also find pro-debtor PBL reforms increasing value-added growth rates across all industries, and by larger margins in industries with more innovation potential. Our difference-in-differences regressions use patents and PBL reforms for 33 countries from 1990 to 2002, with subsequent years used to measure citations to patents in this period.

Suggested Citation

  • Douglas Cumming & Randall Morck & Zhao Rong & Minjie Zhang, 2024. "Personal Bankruptcy Law and Innovation around the World," NBER Working Papers 32826, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32826
    Note: CF
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    More about this item

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G5 - Financial Economics - - Household Finance
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • P1 - Political Economy and Comparative Economic Systems - - Capitalist Economies
    • P50 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - General

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