Bankruptcy Business Resource Materials
Entrepreneurship Law Editorial Team
Wendell Schollander & Wes Schollander, The Small Business Owner's Guide to Bankruptcy: Know Your Legal Rights, Recover From Mistakes, and Start Over Successfully (2002).
Abstract (from Amazon Product Description):
Money problems don't have to mean the end of your business. Many small business owners make decisions that prevent them from using the bankruptcy laws to save their businesses, homes or other property.
Teresa A. Sullivan et al., Financial Difficulties of Small Businesses and Reasons for Their Failure (1998).
Abstract (from Intuit Proline website):
Despite its age, this is still one of the most current and authoritative overviews of small business failure available.
Ralph E. Warner & Bethany K. Laurence, Save Your Small Business: 10 Crucial Strategies to Survive Hard Times or Close Down & Move On (2009).
Abstract (from Amazon Product Description):
A National Small Business Association study showed that among 500 businesses polled, 44% said they had used credit cards to meet capital needs in the previous six months. 57% said their card terms had worsened over the last year. The tightening of credit has made it difficult for a growing number of smaller companies to meet payroll and fulfill customer orders, while still others have been forced to lay off workers. In these tough economic times of falling demand, impatient creditors, tight credit and fierce competition, staying in the black is a constant battle, requiring that business owners be smart and decisive under pressure.
Kenneth M. Ayotte, Bankruptcy and Entrepreneurship: The Value of a Fresh Start, 23 J.L. Econ. & Org. 161 (2007).
This article considers bankruptcy law design in a setting that is appropriate for entrepreneurial firms. These firms are characterized by a dependence on an owner-manager who is essential to the firm and must be given incentive through an ownership stake to maximize the value of the project. In a relationship-lending environment, the banks that fund entrepreneurs cannot capture the gains from providing the entrepreneur with this stake, and this leaves the entrepreneur emerging from bankruptcy with a larger debt burden than is socially efficient. In this setting, a "fresh-start" bankruptcy policy provides greater debt relief than the bank would approve voluntarily, and this generates greater social surplus. The results suggest the value of separate procedures for small business bankruptcies that allow some mandatory debt relief to preserve ex post incentives.
Joseph Bruderl, Peter Preisendorfer & Rolf Ziegler, Survival Chances of Newly Founded Business Organization, 57 Am. Soc. Rev. 227-242 (1992).
Human capital theory and organizational ecology offer a comprehensive set of factors that influence the mortality of newly formed business organizations. Human capital theory identifies individual characteristics of the founder as important prerequisites for survival. Organizational ecology emphasizes organizational characteristics and environmental conditions. We test basic hypotheses derived from both theories using retrospective data from a survey of 1,849 business founders in Germany. Organizational characteristics, especially number of employees and amount of capital invested, and organizational strategies, especially businesses aiming at a national market, are the most important determinants of business survival. The human capital characteristics of the founder, especially years of schooling and work experience and industry-specific experience, show strong direct and indirect effects as well.
Richard B. Carter & Howard E. Van Auken, Small Firm Bankruptcy, 44 J. Small Bus. Mgmt. 4 (2006).
Abstract (from authors): From the results of a survey we compare the demographics and potential problem situations of 57 bankrupt firms to 55 nonbankrupt firms in an attempt to identify root causes of bankruptcy. Results indicate that the most serious problems of bankrupt firms can be condensed into three categories: lack of knowledge, inaccessibility to debt, and economic climate. Bankrupt firms also appear to be older, more likely to be in the retail industry, and organized as proprietorship or partnership than nonbankrupt firms. They are also less likely to use the Internet in their business operations than the nonbankrupt firms. One surprising finding is that while both subsamples found knowledge important, the nonbankrupt sample found it significantly more important than the bankrupt firms. This evidence provides insights for governments and academic institutions in their efforts to provide resources that may help reduce the incidence of bankruptcy, especially during times of declining economic health.
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LuAnn Ricketts Gaskill, Howard E. Van Auken & Ronald A. Manning, A Factor Analytic Study of the Perceived Causes of Small Business Failure, 31 J. Small Bus. Mgmt. 18-31 (1993).
Abstract (from authors): This study examined perceived factors attributed to the failure of small business apparel and accessory retailers. Factor analysis was used to analyze 35 variables identified in the literature as contributors to business closings. Analysis of the results suggest four factors to be associated with failure: managerial and planning functions, vendor relations, competitive environment, and premature overexpansion. Results are discussed in relation to a conceptual model of small firm performance and to previous research on small business failure.
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Graham Hall, Reasons for Insolvency among Small Firms: A Review and Fresh Evidence, 4 Small Bus. Econ. 237-250 (1992).
Seung-Hyun Lee, Yasuhiro Yamakawa, Mike W. Peng & Jay B. Barney, How Do Bankruptcy Laws Affect Entrepreneurship Development Around the World, 26 J. Bus. Venturing 16. (2011).
Abstract (from author): How do bankruptcy laws as formal institutions affect entrepreneurship development around the world? Do entrepreneur-friendly bankruptcy laws encourage more entrepreneurship development at a societal level? The authors posit that if bankrupt entrepreneurs are excessively punished for failure, they may give up potentially high-return but inherently high-risk opportunities to start new businesses. Amassing a cross-country database from 29 countries spanning 19 years (1990–2008), the authors found that lenient, entrepreneur-friendly bankruptcy laws are significantly correlated with the level of entrepreneurship development as measured by the rate of new firm entry.
Matthijs H. M. Hammer, How to Reduce Entrepreneurial Failure in the Post Start-Up Phase (The 18th Annual High Technology Small Firms Conference, University of Twente, Enschede, The Netherlands, 2010), available at http://ssrn.com/abstract=2004206.
The field of entrepreneurial start-ups is broadly studied by scholars. To increase the amount of successful entrepreneurs, the stimulation for more starting entrepreneurs is a referenced field of research and subject to governmental stimulation. More entrepreneurs lead to a bigger gross national product, which has a positive impact on an economic region. More new entrepreneurs do not mean more successful entrepreneurs. According to prior research, in half of the cases of entrepreneurial exit, the exit was more or less avoidable. Beside the stimulation of more people to become an entrepreneur the reduction of the entrepreneurial failure in the post start-up phase of a venture is worth considering in order to get more successful entrepreneurs. This PhD proposal wants to shed light on that phase of the entrepreneurial process and want to identify effective interventions to prevent entrepreneurial failure.
Michelle M. Harner, Mitigating Financial Risk for Small Business Entrepreneurs, 6 Ohio St. Entrepren. Bus. L.J. 469 (2011).
Financial distress by definition threatens a company's viability. Entrepreneurial and start-up entities are particularly vulnerable to this threat. Yet, much of the discussion following the recent recession focuses almost exclusively on financial institutions and “too-big-to-fail” entities. This essay re-examines lessons gleaned from the recession in the context of smaller, entrepreneurial entities. Specifically, it analyzes how small business entrepreneurs might invoke principles of enterprise risk management to mitigate the long-term impact of financial distress on their business models. It also considers related refinements to extant small business regulations, including the U.S. bankruptcy laws. The essay's primary objective is to help policymakers, entrepreneurs and investors rethink financial distress and recognize opportunities for “successful failures.”
Seung-Hyun Lee et al., How Do Bankruptcy Laws Affect Entrepreneurship Development Around the World, 26 J. Bus. Venturing 505 (2011).
(adapted from journal):
How do bankruptcy laws as formal institutions affect entrepreneurship development around the world? Do entrepreneur-friendly bankruptcy laws encourage more entrepreneurship development at a societal level? The authors posit that if bankrupt entrepreneurs are excessively punished for failure, they may give up potentially high-return but inherently high-risk opportunities to start new businesses. Amassing a cross-country database from 29 countries spanning 19 years (1990–2008), theu find that lenient, entrepreneur-friendly bankruptcy laws are significantly correlated with the level of entrepreneurship development as measured by the rate of new firm entry.
Robert N. Lussier, A Nonfinancial Business Success versus Failure Prediction Model for Young Firms, 33 J. Small Bus. Mgmt. 8-20 (1995).
Abstract provided by authors: This survey study of 216 small business owners developed and tested a success versus failure prediction model. Logistic regression was used to test the model. The model consists of 15 independent variables (planning, professional advisors, education, staffing, parents owned a business, capital, record keeping and financial control, industry experience, management experience, product/service timing, economic timing, age of owner, partners, minority ownership, marketing skills) identified in the literature as contributing factors to success versus failure. Analysis of the results suggest that the first four variables are significant predictors of success or failure.
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Sunita Panicker & Mathew J. Manimala, Successful Turnarounds: The Role of Appropriate Entrepreneurial Strategies (IIMB Working Paper No. 337, 2011), available at http://ssrn.com/abstract=1860948.
All organizations are set up with an objective to create value to the society. This necessitates organizations to generate revenues to support all its stakeholders. However, in the rat race to succeed, most organizations are unable to generate revenues for sustainable operations. It is obvious that organizations cannot survive without profits/surpluses and the inability to generate surpluses would lead to industrial sickness. Bringing such organizations back to health requires entrepreneurial strategies at two levels, namely, from the negative to the breakeven and from breakeven to the positive. Hence, the turnaround management is a doubly entrepreneurial act. The objective of this paper is to understand the strategies used in successful turnarounds and compare them with those of the failed ones and thereby help turnaround managers to increase their success rate so as to enhance the value of these organizations to society.
Knut Roed & Jens Skogstrom, Creative Unemployment (IZA Discussion Paper No. 5373, 2011), available at http://ssrn.com/abstract=1728330.
Abstract (from author): The authors examine the impact of job loss on entrepreneurship behavior in Norway. Their identification strategy relies on the use of mass layoffs caused by bankruptcies as indicators of exogenous displacement. The authors found that working in a company which is going to close down due to bankruptcy during the next four years raises the subsequent entrepreneur rate by 3.7 percentage points (155%) for men and 1.8 percentage points (180%) for women, compared to working in a stable firm. These estimates are much larger than what has previously been reported in the literature. Taking into account that many workers lose their jobs in the comparison group of stable firms also, the authors reckon that the full effects of displacement are even larger.
Stephen C. Perry, The Relationship between Written Business Plans and the Failure of Small Businesses in the US, 39 J. Small Bus. Mgmt. 201-208 (2001).
Abstract (from the author): The objective of this study was to investigate the influence of planning on U.S. small business failures. A "failure" was defined as a bankruptcy with losses to creditors; firms with fewer than 500 employees were considered "small." Recently failed firms were selected randomly and matched with non-failed firms on the basis of age, size, industry, and location. The sampling frame was businesses listed in the Dun & Bradstreet credit reporting database. A paired-sample t -test was used to investigate differences between the failed firms and matched non-failed firms. The main conclusion was that very little formal planning goes on in U.S. small businesses; however, non-failed firms do more planning than similar failed firms did prior to failure.
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Ann Mari Sellerberg, 'Family Money' and 'Business Money': Bankrupt Entrepreneurs in a 'Question Situation', 12(4) Cmt’y, Work & Fam. 355 (2009).
Abstract (from author):
This paper addresses the question of bankruptcy and honesty in local contexts, and especially the problem of the bankrupt small businessman in conveying 'honesty' to the local community. Studying bankrupt entrepreneurs, the analysis explores a tacit dialogue between the failed businessmen and the small town communities where they live and work. The bankrupts respond to their seemingly mistrustful surroundings by demonstrating their respect for the dividing line between two social categories of money: 'company money' and 'family money'. This discursive resource expresses business ethics and respectability, both essential for the bankrupt entrepreneur to start another business in the local community. The empirical material in the study consists of interviews with 22 businessmen who had created small businesses and experienced at least one bankruptcy, half of them in small towns. The entrepreneurs were found through court records and word of mouth. Interviews were conducted by the author and by graduate students from the Department of Sociology in Lund. All interviews were tape-recorded and transcribed verbatim.
David Smallbone, Success and Failure in New Business Startups, 8 Int’l Small Bus. J. 34-47 (1990).
Abstract: This paper aims to contribute to knowledge of the characteristics and problems of new firms through a longitudinal study of a group of new business helped to start by a local enterprise agency, a unique British organization which provides free or low-cost advice and support to young firm and which are themselves funded by large local business and local authorities. The characteristics of surviving and failed businesses are described, together with the problems faced in the initial trading period. The role of external agencies in providing continued support after start up is also discussed briefly. Apart from contributing to a more informed assessment of the recent growth in the number of new business and self-employed, the paper outlines simplification of the findings for improving the quality of new business starts.
Howard Van Auken, Jeffrey Kaufmann & Pol Herrmann, An Empirical Analysis of the Relationship Between Capital Acquisition and Bankruptcy Laws, 47(1) J. Small Bus. Mgm’t 23 (2009).
Abstract (from authors):
Ineffective capital acquisition decisions at start-up may lead to business failure and bankruptcy; a result which is both costly and disruptive to the owners and other stakeholders of the firm. To cope with the risk of failure, owners embark on a variety of risk-reducing activities whereas the U.S. government attempts to moderate the downside effects of such failures through the rules surrounding bankruptcy. Previous studies imply that as owners become more aware of the protections offered through the government regulation of bankruptcy, they should become less concerned with the effects of failure and be willing to raise higher levels of initial capital. Raising higher levels of initial capital, in turn, leads owners to take actions intended to reduce firm risk and to minimize the threat to their personal financial security. Data from a sample of small firms confirm our hypothesis by showing that as the level of initial capital acquisition increases, owners embark on activities intended to reduce firm risk. However, capital acquisition is not associated with the owner's familiarity with bankruptcy regulations. As a result, governmental objectives in establishing these regulations may not be achieved. Our findings have implications for firms’ owners, consultants, and policymakers, in terms of the relationship between an entrepreneur's knowledge of bankruptcy laws and the financing of their enterprises.
John Watson & Jim E. Everett, Do Small Businesses Have High Failure Rates?, 34 J. Small Bus. Mgmt. 45-52 (1996).
Abstract (from the authors): This study seeks to clarify a number of apparent misconceptions concerning small business failure, in the hope that prospective entrepreneurs may he more reliably informed about the risks involved. The results may also help to ensure that future policy decisions made by governments, financial institutions, and other groups with an interest in small business are more soundly based. Failure rates resulting from the use of a number of different definitions found in the literature are estimated using data collected on 5,196 small business start-ups in 57 managed shopping centers across the five mainland states of Australia and covering the period 1961-1990. Reported failure rates vary from a high of more than 9 per cent per annum to a low of less than 1 per cent per annum depending on the choice of failure definition.
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John Armour & Douglas J. Cumming, Bankruptcy Law and Entrepreneurship, 10 Am. L. & Econ. Rev. 2 (2008).
The researchers investigate the link between bankruptcy and entrepreneurship using data on self employment over 16 years (1990-2005) and 15 countries in Europe and North America. They compile new indices reflecting how `forgiving' personal bankruptcy laws are, reflecting the time to discharge. These measures vary over time and across the countries studied. They show that bankruptcy law has a statistically and economically significant effect on self employment rates when controlling for GDP growth, MSCI stock returns, and a variety of other legal and economic factors. The results have clear implications for policymakers.
Timothy M. Bates & Alfred R. Nucci, An Analysis of Small Business Size and Rate of Discontinuance, 27 J. Small Bus. Mgmt. 1 (1989).
Abstract: This study investigates small business failure rates in relation to several measures of firm size. Utilizing the Characteristics of Business Owners (CBO) data base, a nationwide sample of firms is utilized that is representative of the small business universe. One subset--small business employers--is shown to have relatively low rates of failure, while another group--very small firms with no employees--exhibits relatively high rates of business discontinuance. The finding that the probability of firm failure is strongly (inversely) related to firm size is shown to hold up as well when the age of the business is controlled for.
Jim E. Everett & John Watson, Small Business Failure Rates: Choice of Definition and Industry Effects, 17 Int’l Small Bus. J. 33 (1999).
Abstract (from publisher):
Results from previous studies examining the incidence of small business failure have reported significant variations in failure rates between industry sectors. Indeed, the results from some studies are in direct conflict. For example, Lowe, McKenna and Tibbits (1991) reported that the manufacturing sector had the highest failure rate while Bruderi, Preisendorfer (1992) and Phillips and Kirchoff (1989) found that the manufacturing sector had the highest survival rate. The significant variations in reported failure rates and the apparent conflict between the findings of some studies must surely be a source of some confusion for policy- makers and others with an interest in the small business sector. The results of this study suggest that reported failure rates may depend heavily on the definition of failure adopted. A better understanding of the effect that choice of failure definition may have on reported failure rates should lead to improved policy decisions by governments, financial institutions and other groups with interest in small business.
Brian Headd, Redefining Business Success: Distinguishing between Closure and Failure, 21 Small Bus. Econ. 51-61 (2003).
Abstract (from author):
New firms are believed to have high closure rates and these closures are believed to be failures, but two U.S. Census Bureau data sources illustrate that these assumptions may not be justified. The Business Information Tracking Series (BITS) showed that about half of new employer firms survive beyond four years and the Characteristics of Business Owners (CBO) showed that about a third of closed businesses were successful at closure. The CBO also made it possible to compare results of models of business survival and business success, but because of non-response bias logit models were used. Similar to previous studies, firms having more resources – that were larger, with better financing and having employees – were found to have better chances of survival. Factors that were characteristic of closure – such as having no startup capital and having a relatively young owner – were also common in businesses considered successful at closure. Hence, few defining factors can be isolated leading to true failures. The significant proportion of businesses that closed while successful calls into question the use of “business closure” as a meaningful measure of business outcome. It appears that many owners may have executed a planned exit strategy, closed a business without excess debt, sold a viable business, or retired from the work force. It is also worth noting that such inborn factors as race and gender played negligible roles in determining survivability and success at closure.
Seung-Hyun Lee, Yasuhiro Yamakawa, & Mike W. Peng, An Empirical Examination of 'Barrier to Exit': How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level? Babson College Entrepreneurship Research Conference (BCERC) 2007; Frontiers of Entrepreneurship Research 2007.
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.
Aparna Mathur, A Spatial Model of the Impact of Bankruptcy Exemptions on Entrepreneurship (2005).
Abstract (from author):
This is the first paper that highlights the role of spatial interactions, in the context of state bankruptcy laws, in the entrepreneurship decision. The focus of the paper is on small businesses. Small and medium enterprises represent between 96 percent to 99 percent of all enterprises in the US. This paper asks whether laws that facilitate easy exit are an important consideration in entry of small businesses. The study uses U.S. data, since the U.S. has sufficient variation in bankruptcy law across states. This paper studies the decision of an individual to begin (or end) a business in a particular state, as a function of bankruptcy regulations and other macroeconomic and business variables in that state as well as those in neighboring states. I use spatial econometric techniques to model these interactions. The study uses longitudinal data from the SIPP dataset. Model estimation is computationally challenging due to the large number of observations and the presence of a lagged endogenous variable, individual random effects, and state dummies. The paper finds that higher bankruptcy exemptions in neighboring states lower the probability of starting a business in the state of residence. The bankruptcy exemption in one’s own state has a significant and positive impact on entrepreneurship.
Aparna Mathur, Beyond Bankruptcy: Does the Bankruptcy Code Provide a Fresh Start to Entrepreneurs? (2011), available at http://www.sba.gov/sites/default/files/Bankruptcy%20Report_0.pdf.
Abstract (adapted from the Executive Summary):
This paper assesses the extent to which the U.S. bankruptcy system is effective in providing small businesses a “fresh start” after a bankruptcy filing. The author uses data from the 1993, 1998 and 2003 National Survey of Small Business Finances to explore how firms fare after a bankruptcy filing. The results suggest some areas of concern though there are clearly promising aspects as well…. To summarize, while the bankruptcy code does help certain businesses get back on their feet, the persistence of credit access issues after bankruptcy suggests that the promise of the “fresh start” has not been fully realized.
Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, Financial Difficulties of Small Businesses and Reasons for Their Failure, Nat’l Tech. Info. Serv. (1999).
Seung-Hyun Lee, Yasuhiro Yamakawa, & Mike W. Peng , An Empirical Examination of "Barrier to Exit": How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level? (2007).