Bankruptcy Law and Entrepreneurship John Armour CBR & Law - - PowerPoint PPT Presentation

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Bankruptcy Law and Entrepreneurship John Armour CBR & Law - - PowerPoint PPT Presentation

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Bankruptcy Law and Entrepreneurship John Armour CBR & Law Faculty, Cambridge University Douglas Cumming Director, Severino Center for Entrepreneurship, Rensselaer Polytechnic Institute CBR Summit: 29-30 March 2006 Innovation and

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CBR Summit: Innovation and Governance 29-30 March 2006

Bankruptcy Law and Entrepreneurship

John Armour

CBR & Law Faculty, Cambridge University

Douglas Cumming

Director, Severino Center for Entrepreneurship, Rensselaer Polytechnic Institute

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CBR Summit: Innovation and Governance 29-30 March 2006

Motivation

  • Growing salience of ‘entrepreneurship policy’

– Personal bankruptcy law believed to be relevant by UK/EU policymakers

  • Reform of bankruptcy laws

– 2004: Enterprise Act facilitates fresh start in UK – 2005: Bankruptcy Reform Act restricts fresh start in US

  • No international study shows link between bky law and

entrepreneurship across countries

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CBR Summit: Innovation and Governance 29-30 March 2006

What determines entrepreneurship? (1)

  • Individual characteristics

– Risk tolerance (Wagner and Sternberg, 2002) – Optimism (Venkataraman and Lee, 2001; Landier and Thesmar, 2003) – Wealth endowment (e.g. Blanchflower and Oswald, 1997) – Human capital (e.g. Lazear, 2002; Wagner, 2003)

  • Economic factors

– GDP growth (e.g. Landier, 2002; Fan and White, 2003)

  • Cultural factors

– Attitudes to risk (e.g. Hofstede et al, 2002)

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CBR Summit: Innovation and Governance 29-30 March 2006

What determines entrepreneurship? (2)

  • Regional geography

– Agglomeration externalities (e.g. Saxenian, 1994)

  • Fiscal regime

– CGT vs income tax (Poterba, 1989a,b; Gompers and Lerner, 1998)

  • Legal regime

– IP protection (Gilson, 1999; Lerner, 2002; Bigus, 2004) – Ease of incorporation (Djankov et al, 2002) – Personal bankruptcy law (Fan and White, 2003; Georgellis and Wall, 2002; Persad, 2004)

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CBR Summit: Innovation and Governance 29-30 March 2006

What determines entrepreneurship? (3)

  • Bankruptcy Law (US)

– Berkowitz and White (2004) Fan and White (2003) – Georgellis and Wall (2002) – Persad (2004)

  • Prior empirical work does not

– Consider international differences – Consider role of ‘fresh start’

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CBR Summit: Innovation and Governance 29-30 March 2006

Hypothesis

“Relaxing severity of personal bankruptcy law will stimulate entrepreneurship”

Severity ≈ time to discharge (if any), exemptions, disabilities

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CBR Summit: Innovation and Governance 29-30 March 2006

Intuitions

1. Marginal entrepreneurs (Adler et al, 2000)

– Insurance – Incentives – US evidence: Fan and White, 2003; Georgellis and Wall, 2002; Berkowitz and White, 2004; Persad, 2004.

2. Inframarginal entrepreneurs

– Bad projects vs bad luck – Budget constraint vs deadweight loss

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CBR Summit: Innovation and Governance 29-30 March 2006

Summary of Key Results

Income – Capital Gains Tax Patents (lagged)

  • Bankruptcy Law

(low #s better) Time Trend Internet Bubble

+

GDP Growth

+

MSCI Stock Market Returns Compendia Self Employment Data Eurostat Self Employment Data

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CBR Summit: Innovation and Governance 29-30 March 2006

Methodology (1)

  • Dependent variables

– Self Employed / Population (EUROSTAT) – Self Employed (inc. owner-managers) / Work Force (COMPENDIA)

  • Specification (Judge et al, 1988)

– Country fixed effects – Data de-trended

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CBR Summit: Innovation and Governance 29-30 March 2006

Methodology (2)

  • Explanatory variables

– Time to discharge (or life expectancy) – Stock market returns – GDP growth – ‘Internet Bubble’ (2000-2002) – Income – Capital Gains Tax – Patents (lagged) – Time Trend

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CBR Summit: Innovation and Governance 29-30 March 2006

Ireland Canada Finland Belgium UK Sweden Austria Netherlands France Denmark Germany US Portugal Italy Spain Real GDP Growth Time to Discharge in Bankruptcy / 1000 Self Employment / Population 0.02 0.04 0.06 0.08 0.1 0.12 Averages 1990 - 2002

Figure 2. Self Employment / Population, 1990 - 2002

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CBR Summit: Innovation and Governance 29-30 March 2006

Table 2. Summary Statistics

0.056 0.056 # Start-up Procedures < 6.5

  • 4.628***

0.048 3.074*** 0.064 # Start-up Procedures > 6.5 5 0.055 0.055 Fresh start available

  • 3.000***

0.050 3.045*** 0.064 No fresh start 4 0.052 0.060 All Other Years (1990-2002) 0.061 0.053 0.053 0.060 Years 1999 and 2000 Only 3 0.053 0.053 MSCI Index Return < 0

  • 0.568

0.052 2.659*** 0.060 MSCI Index Return > 0 2 0.052 0.059 Real GDP Return < 0 0.126 0.052 0.374 0.060 Real GDP Return > 0 1 Difference Test Average Value Difference Test Average Value Self Employment/Population All Countries, Excluding Italy, Portugal, and Spain Self Employment/Population Full Sample Including All Countries Test #

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CBR Summit: Innovation and Governance 29-30 March 2006

  • 8.66
  • 8.67
  • 8.66
  • 8.67
  • 8.68
  • 8.69
  • 8.68

Akaike Information Statistic 866.18 865.86 864.71 864.34 864.34 864.28 862.22 Loglikelihood Function 437.51 460.54 481.70 509.41*** 542.44*** 579.21*** 608.06*** F-Statistic 0.98 0.98 0.98 0.98 0.98 0.98 0.98 Adjusted R2 195 156 180 195 195 195 195 Number of Observations

  • 5.34E-05

Time Trend

  • 8.55E-04
  • 0.00097*

Dummy for 1999 and 2000 1.42E-04 1.19E-04 1.02E-04 Income - Capital Gains Tax 1.84E-08

  • 4.78E-08
  • 7.83E-08
  • 4.98E-09

Patents 4.14E-03 5.00E-03 5.67E-03 4.24E-03 4.22E-03 MSCI Index 0.02978** 0.02797** 0.02137* 0.02197* 0.02195* 0.02246* Real GDP Growth

  • 0.000116***
  • 0.000108***
  • 0.000095***
  • 0.000095***
  • 0.000095***
  • 0.000093***
  • 0.000091***

Time to Discharge Yes Yes Yes Yes Yes Yes Yes Country Fixed Effects? Model (7) Model (6) Model (5) Model (4) Model (3) Model (2) Model (1) EUROSTAT DATA Table 4. Regression Analyses of Self Employment / Population

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CBR Summit: Innovation and Governance 29-30 March 2006

  • 6.81
  • 6.71
  • 6.71
  • 6.72
  • 6.73
  • 6.72
  • 6.73

Akaike Information Statistic 379.67 373.09 372.12 371.94

  • 9.56

369.60 369.30 Loglikelihood Function 166.03*** 155.15*** 162.15*** 172.56*** 182.42*** 189.77*** 203.50*** F-Statistic 0.97 0.97 0.97 0.97 0.97 0.97 0.97 Adjusted R2 105 105 105 105 105 105 105 Number of Observations

  • 0.00075***

Time Trend

  • 0.00064
  • 0.00333

Dummy for 1999 and 2000 0.00015

  • 0.00014
  • 0.00023

Income - Capital Gains Tax 0.0000001

  • 0.000001
  • 0.000001*
  • 0.000001**

Patents 0.08503* 0.06102 0.08251* 0.08524* 0.07675* MSCI Index

  • 0.02273
  • 0.02146
  • 0.05767
  • 0.06146
  • 0.06258
  • 0.03529

Real GDP Growth

  • 0.00034***
  • 0.00022***
  • 0.00019***
  • 0.00019***
  • 0.00018***
  • 0.00015***
  • 0.00016***

Time to Discharge Yes Yes Yes Yes Yes Yes Yes Country Fixed Effects? Models (7) Model (6) Model (5) Model (4) Model (3) Model (2) Model (1) COMPENDIA DATA Table 5. Further Robust Checks: Regression Analyses of Self-Employed Business Owners / Total Labour Force

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CBR Summit: Innovation and Governance 29-30 March 2006

Economic Significance

  • We show that changes in bankruptcy laws in Europe in the 1990s

are consistent with an increase in self employed / population of, e.g.

  • 0.008 in Germany (9% of the average self-employment rate in

Germany)

  • 0.009 in the Netherlands (8% of the average self-employment rate in

the Netherlands)

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CBR Summit: Innovation and Governance 29-30 March 2006

Implications

  • General

– Personal bankruptcy law matters for entrepreneurs – In our study, its economic significance is greater than GDP growth and stock market returns.

  • For recent law reforms

– UK reforms likely to stimulate entrepreneurship – US reforms the reverse

  • NB Limitations / caveats:

– Impact on consumer bankruptcies – Welfare implications ambiguous