Can Strong Creditors Inhibit Entrepreneurial Activity?

We examine startup entry and exit activity following the staggered adoption of modern-day fraudulent transfer laws in the United States. These laws strengthen unsecured creditors’ rights and are particularly important for entrepreneurs whose personal assets commingle with the firm’s. Using administrative data from the U.S. Census Bureau, we document declines in startup entry, churning among entrants, and closures of existing firms after these laws pass. Firm financial data shows that entrepreneurs lower leverage by reducing unsecured credit. Our results suggest that excessive creditor rights can reduce entrepreneurs’ appetite for risk, thereby slowing down the extensive margin process of reallocating resources from failing to new businesses.

Keywords: Creditor rights; bankruptcy; entrepreneurship; startups; reallocation; churn

JEL Classification: G21; G33; K22; L26; M13

Suggested Citation: Suggested Citation

Ersahin, Nuri and Irani, Rustom M. and Waldock, Katherine, Can Strong Creditors Inhibit Entrepreneurial Activity? (January 20, 2018). US Census Bureau Center for Economic Studies Paper No. CES-WP-16-31, Available at SSRN: https://ssrn.com/abstract=2809179 or http://dx.doi.org/10.2139/ssrn.2809179