How Does Personal Bankruptcy Law Affect Start-Ups?
The Review of Financial Studies, Forthcoming
74 Pages Posted: 3 Oct 2011 Last revised: 9 Aug 2017
Date Written: July 31, 2016
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 start-ups. 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.
Keywords: Debtor Protection, Personal Bankruptcy Law, Start-ups, Bank Financing
JEL Classification: G32, G33, K35, M13
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