An Empirical Examination of 'Barrier to Exit': How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level?

Abstract

Does an entrepreneur-friendly bankruptcy law encourage more entrepreneurship development at a societal level? How does bankruptcy law affect entrepreneurship development around the world? Drawing on a real options perspective, we argue that if bankrupt entrepreneurs are excessively punished for failure, they may pass potentially high-return but inherently high-risk opportunities. Amassing a longitudinal, cross-country data base from 35 countries spanning ten years, we find that a lenient, entrepreneur-friendly bankruptcy law encourages entrepreneurs to take risks and thus let entrepreneurship prosper. Components of an entrepreneur-friendly bankruptcy law are: (1) the availability of a reorganization bankruptcy option, (2) the time spent on bankruptcy procedure, (3) the cost of bankruptcy procedure, (4) the opportunity to have a fresh start in liquidation bankruptcy, (5) the opportunity to have an automatic stay of assets, (6) the opportunity for managers to remain on the job after filing for bankruptcy, and (7) the protection of creditors at the time of bankruptcy.