Bankruptcy and Small Firms' Access to Credit

By Jeremy Berkowitz, M. White. 2004

246 citations recorded by the source corpus.

In this paper, we investigate how personal bankruptcy law affects small firms' access to credit. When a firm is unincorporated, its debts are personal liabilities of the firm's owner, so that lending to the firm is legally equivalent to lending to its owner. If the firm fails, the owner has an incentive to file for personal bankruptcy, since the firm's debts will be discharged and the owner is only obliged to use assets above an exemption level to repay creditors. The higher the exemption level, the greater is the incentive to file for bankruptcy. We show that supply of credit falls and demand for credit rises when non-corporate firms are located in states with higher bankruptcy exemptions. We test the model and find that, if small firms are located in states with unlimited rather than low homestead exemptions, they are more likely to be denied credit, they receive smaller loans and interest rates are higher. Results for non-corporate versus corporate firms suggest that lenders often disregard small firms' organizational status in making loan decisions.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/ae32fdfeeda8f050ae2c5da5f4ffe847d651a6f7

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Citations in the corpus

Firm exit after distress: differentiating between bankruptcy, voluntary liquidation and M&A (2011, unknown): “We herewith also add to the debate on the design of efficient bankruptcy procedures (e.g., Berkowitz and White 2004; Jappelli et al. 2005).”
The Capital Structure Decisions of New Firms (2010, unknown): “This argument is consistent with Berkowitz and White (2004), who show that higher personal bankruptcy exemption levels are associated with more credit denials among small businesses.”
Entrepreneurship, Frictions, and Wealth (2006, unknown): “Berkowitz and White (2004) show that the higher exemption levels on personal bankruptcy, the higher the probability of being denied credit and the smaller the amount of loans made.”
Financing Constraints and Entrepreneurship (2009, background): “For example, Berkowitz and White (2004) find that entrepreneurs are less likely to get credit for their startups in U.S. states with stronger bankruptcy protection for individuals.”
Entrepreneurship as Experimentation (2014, background): “On the one hand, bankruptcy laws that favor creditors allow them to recoup as much capital as they can from the startup—encouraging them to lend in the first place (Berkowitz and White 2004; Cumming forthcoming; Cerqueiro, Hegde, Penas, and Seamans 2013).”
How does owners’ exposure to idiosyncratic risk influence the capital structure of private companies? (2008, unknown): “The median value for home equity is USD 15,000 and the median value for other personal assets is USD 7,000 (Berkowitz and White (2004)).”
Entrepreneurs' Gender and Financial Constraints: Evidence from International Data (2009, methodology): “See, for example, Berkowitz and White (2004) for an analysis of firms, Gropp, Scholz and White (1997) for an analysis of individuals and Cavalluzzo et al.”
How do bankruptcy laws affect entrepreneurship development around the world (2011, unknown): “Not surprisingly Berkowitz and White (2004) find that in the United States, the rejection rate for financing is over 30% higher in states with unlimited bankruptcy exemptions compared to states with low exemptions.”