Bankruptcy and Small Firms' Access to Credit

Jeremy Berkowitz () and Michelle J. White ()
Additional contact information
Jeremy Berkowitz: University of Houston
Michelle J. White: University of California, San Diego and NBER

RAND Journal of Economics, 2004, vol. 35, issue 1, 69-84

Abstract: We investigate how personal bankruptcy law affects small firms' access to credit. When a firm is unincorporated, its debts are personal liabilities of the firm's owner, so that lending to the firm is legally equivalent to lending to its owner. If the firm fails, the owner has an incentive to file for personal bankruptcy, since the firm's debts will be discharged. The higher the exemption level, the greater the incentive to file for bankruptcy. We test the model and find that if small firms are located in states with unlimited rather than low homestead exemptions, they are more likely to be denied credit, and when loans are made, they are smaller and interest rates are higher. Results for noncorporate versus corporate firms suggest that lenders often disregard small firms' organizational status in making loan decisions.

Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (133)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rje:randje:v:35:y:2004:1:p:69-84

Ordering information: This journal article can be ordered from
https://editorialexp ... i-bin/rje_online.cgi

Access Statistics for this article

More articles in RAND Journal of Economics from The RAND Corporation
Bibliographic data for series maintained by ().