Small Business Economics

, Volume 31, Issue 1, pp 5–19

The US bankruptcy law and private equity financing: empirical evidence

Article

DOI: 10.1007/s11187-008-9105-2

Cite this article as:
Hasan, I. & Wang, H. Small Bus Econ (2008) 31: 5. doi:10.1007/s11187-008-9105-2

Abstract

The generous personal bankruptcy law in the United States is important to entrepreneurs because failed entrepreneurs can resort to this system to shelter part of their wealth against negative consequences of business failure. Fan and White (Journal of Law and Economics XLVI:543–567, 2003) documented that high bankruptcy exemptions provide incentives for entrepreneurs to start/own new businesses. The partial wealth insurance effect provided by the bankruptcy exemptions also has a significant and negative impact on the entrepreneurs’ access to bank credits (Berkowitz and White, The Rand Journal of Economics 35(1):69–84, 2004; Gropp Scholz and White, The Quarterly Journal of Economics 112(1):217-251, 1997). In this article, we investigate whether and to what extent the US bankruptcy law has any effect on venture capital (VC) investment. Making use of company level information, we document that the amount of venture financing received is negatively related to the bankruptcy exemption levels, and the number of rounds of financing as well as the number of VC funds involved is negatively associated with bankruptcy exemptions. Further, we report consistent evidences based on state level data with regard to the effects of the US personal bankruptcy law.

Keywords

Bankruptcy Venture capital 

JEL Classifications

G24 G28 G31 G32 G35 L26 

Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  1. 1.Lally School of Management and TechnologyRensselaer Polytechnic InstituteTroyUSA
  2. 2.Bank of FinlandHelsinkiFinland
  3. 3.Stuart School of BusinessIllinois Institute of TechnologyChicagoUSA

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