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How Does Personal Bankruptcy Law Affect Start-ups?

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  • Cerqueiro, G.M.

    (Tilburg University, School of Economics and Management)

  • Penas, M.F.

    (Tilburg University, School of Economics and Management)

Abstract

We exploit state-level changes in the amount of personal wealth individuals can protect under Chapter 7 to analyze the effect of debtor protection on the financing structure and performance of a representative panel of U.S. startups. The effect of increasing debtor protection depends on the entrepreneur’s level of wealth. Firms owned by mid-wealth entrepreneurs whose assets become fully protected suffer a reduction in credit availability, employment, operating efficiency, and survival rates. We find no such negative effects for low-wealth and high-wealth owners. Our results are consistent with theories that predict that asset protection in bankruptcy leads to a redistribution of credit.Received November 11, 2014; editorial decision August 6, 2016 by Editor Philip Strahan.
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Suggested Citation

  • Cerqueiro, G.M. & Penas, M.F., 2011. "How Does Personal Bankruptcy Law Affect Start-ups?," Other publications TiSEM 37ea5a6c-a7c2-4613-b31c-3, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:37ea5a6c-a7c2-4613-b31c-3a4549a64c98
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    References listed on IDEAS

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    Cited by:

    1. Pankaj C. Patel & Srikant Devaraj, 2021. "The state‐level exemption changes in Chapter 7 protection and entrepreneurial activity in the United States," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(5), pages 1089-1104, July.
    2. Keongtae Kim & Il-Horn Hann, 2019. "Crowdfunding and the Democratization of Access to Capital—An Illusion? Evidence from Housing Prices," Service Science, INFORMS, vol. 30(1), pages 276-290, March.
    3. Koudijs, Peter & Salisbury, Laura, 2020. "Limited liability and investment: Evidence from changes in marital property laws in the US South, 1840–1850," Journal of Financial Economics, Elsevier, vol. 138(1), pages 1-26.
    4. Peter Koudijs & Laura Salisbury, 2016. "Bankruptcy and Investment: Evidence from Changes in Marital Property Laws in the U.S. South, 1840-1850," NBER Working Papers 21952, National Bureau of Economic Research, Inc.
    5. Mette Ejrnæs & Stefan Hochguertel, 2014. "Insurance, Entrepreneurial Start-Up, and Performance," Tinbergen Institute Discussion Papers 14-040/V, Tinbergen Institute.
    6. Montebruno, Piero & Silva, Olmo & Szumilo, Nikodem, 2021. "Judge Dread: court severity, repossession risk and demand in mortgage and housing markets," LSE Research Online Documents on Economics 110474, London School of Economics and Political Science, LSE Library.
    7. Brown, Martin & Serra-García, Marta, 2014. "The Threat of Exclusion and Implicit Contracting," Working Papers on Finance 1407, University of St. Gallen, School of Finance, revised Jun 2016.
    8. Wenping Ye & Zhongfeng Su & David Ahlstrom, 2022. "Bankruptcy laws, entrepreneurs’ socio-cognitions, and the pursuit of innovative opportunities," Small Business Economics, Springer, vol. 59(3), pages 1005-1022, October.
    9. Martin Brown & Marta Serra-Garcia, 2017. "The Threat of Exclusion and Implicit Contracting," Management Science, INFORMS, vol. 63(12), pages 4081-4100, December.
    10. Luca Farè & Marcus Dejardin & Eric Toulemonde, 2024. "Bankruptcy recovery rate and small businesses’ innovation," Applied Economics, Taylor & Francis Journals, vol. 56(32), pages 3870-3903, July.
    11. Meta Brown & Rajashri Chakrabarti & Felipe Severino, 2024. "Personal Bankruptcy Protection and Household Debt," Staff Reports 1099, Federal Reserve Bank of New York.
    12. Marco Celentani & Miguel García-Posada & Fernando Gómez Pomar, 2022. "Fresh start policies and small business activity: evidence from a natural experiment," Working Papers 2210, Banco de España.
    13. Kerr, Sari Pekkala & Kerr, William R. & Nanda, Ramana, 2022. "House prices, home equity and entrepreneurship: Evidence from U.S. census micro data," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 103-119.
    14. Rachel Atkins & Lisa Cook & Robert Seamans, 2022. "Discrimination in lending? Evidence from the Paycheck Protection Program," Small Business Economics, Springer, vol. 58(2), pages 843-865, February.
    15. Douglas Cumming & Minjie Zhang, 2023. "Bankruptcy law and angel investors around the world," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 54(7), pages 1256-1277, September.
    16. Tuyen, Bui Quang & Phuong Anh, Do Vu & Mai, Nguyen Phuong & Long, To Quang, 2023. "Does corporate engagement in social responsibility affect firm innovation? The mediating role of digital transformation," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 292-303.
    17. Geraldo Cerqueiro & María Fabiana Penas & Robert Seamans, 2017. "Personal Bankruptcy Law and Entrepreneurship," Working Papers 17-42r, Center for Economic Studies, U.S. Census Bureau.
    18. Błażej Prusak & Sylwia Morawska & Michał Łukowski & Przemysław Banasik, 2022. "The impact of bankruptcy regimes on entrepreneurship and innovation. Is there any relationship?," International Entrepreneurship and Management Journal, Springer, vol. 18(1), pages 473-498, March.

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    More about this item

    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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