How Does Personal Bankruptcy Law Affect Start-ups?

G.M. Cerqueiro, M.F. Penas

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Volume2011-106
Publication statusPublished - 2011

Publication series

NameCentER Discussion Paper
Volume2011-106

Keywords

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

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  • Cite this

    Cerqueiro, G. M., & Penas, M. F. (2011). How Does Personal Bankruptcy Law Affect Start-ups? (CentER Discussion Paper; Vol. 2011-106). Finance.