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The flip side of the coin: how entrepreneurship-oriented insolvency laws can complicate access to debt financing for growth firms

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Abstract

This study examines the impact of the change towards a more debtor-friendly insolvency law on debt financing of growth firms. Prior studies rarely consider that insolvency laws not only impact entrepreneurship but can also impact the relationship between the firm and its various stakeholders. We consider the impact on the relationship with the key stakeholders of the firm, namely its creditors. Using the recent change in Belgian insolvency law as an exogenous policy shock, we investigate the changes in the use of debt for growth firms, considering the heterogeneity of debt. Our findings indicate that the financing mix for growth companies has altered after the change towards a more debtor-friendly insolvency law: they seem to be less likely to receive financing from financial institutions and trade creditors. However, we found that payments to the government and employees are delayed after the change, probably to compensate for this lack of debt financing.

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Notes

  1. Nonetheless, it is important to note that trade credit is actually relatively expensive, especially when compared to bank debt (Baugnet & Zachary, 2007). For instance, trade creditors often offer a payment discount if the customer pays within a short period (for example, a 3% discount if you pay within 7 days). However, if you do not pay within this period, you consider this discount as 'interest' that you pay later. This is quite a high interest rate in order to obtain credit, compared to an annual interest rate of approximately 2%, that you spend on your bank loan.

  2. As a robustness check we changed the growth indicator from total assets to the average number of employees in our main analysis. Growth was then measured by the evolution of the average number of employees over three years. The results were in line with our main analysis (and additional analysis). The only difference reflects in the results regarding hypothesis 2c. In this analysis, the interaction term was not significant.

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  1. Hasselt University, Martelarenlaan, 42, 3500, Hasselt, Belgium

    Maren Forier, Nadine Lybaert, Maarten Corten, Niels Appermont & Tensie Steijvers

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Forier, M., Lybaert, N., Corten, M. et al. The flip side of the coin: how entrepreneurship-oriented insolvency laws can complicate access to debt financing for growth firms. Eur J Law Econ 56, 461–495 (2023). https://doi.org/10.1007/s10657-023-09783-8

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