Do Stringent Bankruptcy Laws Always Deter Entrepreneurial Activities? A Study of Cultural Influences

Abstract

Stringent bankruptcy laws are generally understood to increase the costs of failure and thus not conducive for entrepreneurship. In this paper, theory is developed and tested exploring the moderating influences of the dimensions of culture—individualism—collectivism, masculinity–femininity, uncertainty avoidance, and power distance. Results of this study, from conditional fixed effects Poisson regressions, support that stringent bankruptcy laws are positively associated with the levels of entrepreneurial activity in certain cultural contexts.

Bankruptcy Regulation and Self-Employment Entry: The Moderating Roles of Income Share, Parenthood, and Hybrid Entrepreneurship

“…With these findings, we contribute primarily to research on the relationship between bankruptcy law and entry into self-employment (e.g., Fan & White, 2003; Fu et al, 2020; Lee et al, 2007, 2011; Peng et al, 2010). Our study is most closely related to recent research that studies the moderating role of national culture (Damaraju et al, 2021), type of entrepreneurship (Fu et al, 2020), and individual elite status (Eberhart et al, 2017) in the relationship between bankruptcy law and self-employment. We continue this line of scholarly inquiry by showing that, even in the same culture and among individuals who experience the same decrease in bankruptcy costs after a reform, how individuals react to higher bankruptcy exemption levels depends on individual-level factors.…”

“…Relatedly, while the majority of prior research examining the role of bankruptcy law for entrepreneurial entry use multi-country data (Damaraju et al, 2021; Fu et al, 2020; Lee et al, 2011; Peng et al, 2010), our paper focuses on bankruptcy regulations within a country. This way, our research is consistent with and expands recent research examining sub-national aspects related to bankruptcy regulation.…”

“…In addition to the comprehensively documented positive association between more lenient bankruptcy regulations and increased entry into self-employment, some studies contextualize this relationship. For example, Damaraju et al (2021) argue that the impact of bankruptcy regulations on entry into self-employment is contingent on national culture, a macro-level context factor. They find that stricter bankruptcy regulation can even encourage entrepreneurial activity in countries whose cultures score high in masculinity, uncertainty avoidance, and power distance.…”

“…Consequently, prior research finds that bankruptcy law, which regulates the costs an individual faces in case of bankruptcy, is conducive to individuals’ deciding to start their own businesses, as a more lenient bankruptcy law limits potential losses (Eberhart et al, 2017; Fan & White, 2003). Because of its importance for entry into self-employment and entrepreneurship in general, bankruptcy law receives widespread attention across the fields of economics (Fan & White, 2003), finance (Cerqueiro et al, 2017), management (Eberhart et al, 2017; Lee et al, 2007), and entrepreneurship (Damaraju et al, 2021; Fu et al, 2020; Lee et al, 2011; Peng et al, 2010).…”

The Impact of Delay: Evidence from Formal Out-of-Court Restructuring

“…In the US roughly 20% of proceedings resulted in reorganization, while this percentage was only 2.5% in France, less than 1% in Sweden (Agrawal et al, 2020, p. 10) and less than 0.5% in Germany (Brouwer, 2006, p. 10). Several factors may contribute to these cross-country differences in reorganization versus liquidation probabilities including whether management stays in power during the bankruptcy procedure, who initiates the procedure, whether there is an automatic stay on asset distribution, how voting rules are designed, the powers given to judges, whether an absolute priority rule (APR) is in place (see Brouwer, 2006;White, 1994), but also culturally how managerial failure is seen in a particular society (Damaraju et al, 2020).…”