Can Strong Creditors Inhibit Entrepreneurial Activity?

Abstract

We examine entrepreneurial 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—particularly among riskier entrants—and closures of existing firms after these laws pass. Firm financial data shows that entrepreneurs lower leverage by reducing demand for unsecured credit. Our results suggest that strong creditor protections can limit entrepreneurs’ appetite for risk, which may reduce churning along the extensive margin among the smallest firms in the economy.

The Pitfalls of Pledgeable Cash Flows: Soft Budget Constraints, Zombie Lending and Under-Investment

“…As this result applies to populations of borrowers with relatively few unicorns, and many bad ideas, its predictions naturally apply to startup firms. Indeed, in this context our model can reconcile the findings in Ersahin et al (2020) that strengthening creditor rights in the US reduced startup entry, especially among riskier firms. Moreover, it can provide an alternative, non-behavioral, explanation for findings in Vig (2013) that higher creditor rights triggered lower borrowing by firms in India, without resorting to any liquidation bias.…”

FinTech Loans, Self-Employment, and Financial Performance

“…Scholars show that restricted access to credit decreases the probability that an individual indulges in self-employment and entrepreneurial activities (Bruhn & Love, 2014;Corradin & Popov, 2015;Herkenhoff et al, 2021;Schmalz, Sraer, & Thesmae, 2017). This effect is further amplified with stronger creditor protection laws (Ersahin, Irani, & Waldock, 2021). However, among serial borrowers, the effect of loan acquisition on self-employment decision is not necessarily the same.…”

FinTech Loans, Self-employment, and Financial Performance

“…Scholars show that restricted access to credit decreases the probability that an individual indulges in self-employment and entrepreneurial activities (Bruhn & Love, 2014;Corradin & Popov, 2015;Herkenhoff et al, 2021;Schmalz, Sraer, & Thesmae, 2017). This effect is further amplified with stronger creditor protection laws (Ersahin, Irani, & Waldock, 2021). However, among serial borrowers, the effect of loan acquisition on self-employment decision is not necessarily the same.…”