Abstract

In this paper, we explore how differences in bankruptcy codes across nations influence the likelihood of an individual starting a high growth aspiration business. Bankruptcy laws have an important influence on entrepreneurial outcomes through both the motivation of individuals to become entrepreneurs, and the extent of finance offered. Parallel to this, the theory reflects tensions between entrepreneur oriented and creditor oriented views.

We propose that the tensions between these entrepreneurship and corporate governance views of bankruptcy laws can be resolved if instead of ordering bankruptcy laws from creditor-oriented to debtor-oriented as in previous literature, one focuses on separate elements of the legal code. Some of these elements (e.g. secured creditors’ priority) are likely to encourage creditors and others (e.g. forced removal of management) to de-motivate entrepreneurs.

Moreover, we propose a moderating relationship between risk attitudes and the elements of the bankruptcy code operating primarily through entrepreneurial motivation. Potential entrepreneurs who are more risk averse are more likely to be deterred in environments where the elements of bankruptcy laws affecting the control rights of the owner-manager are harsher.

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