The US bankruptcy law and private equity financing: empirical evidence |
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| Authors: | Iftekhar Hasan Haizhi Wang |
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| Institution: | (1) Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 8th Street, Pittsburgh Building, Troy, NY 12180-3590, USA;(2) Bank of Finland, 00101 Helsinki, Finland;(3) Stuart School of Business, Illinois Institute of Technology, 565 West Adams Street, Chicago, IL 60661, USA |
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| 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.
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| Keywords: | Bankruptcy Venture capital |
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