Debtor rights, credit supply, and innovation

Geraldo Cerqueiro, Deepak Hegde, María Fabiana Penas, Robert C. Seamans

    Research output: Contribution to journalArticle

    Abstract

    Firms’ innovative activities can be sensitive to public policies that a ect the availability of capital. In this paper, we investigate the e ects of regional and temporal variation in U.S. personal bankruptcy laws on firms’ innovative activities. We find that bankruptcy laws that provide stronger debtor protection decrease the number of patents produced by small firms. Stronger debtor protection also decreases the average quality, and variance in quality, of firms’ patents. We find evidence that the negative e ect of stronger debtor protection on experimentation and innovation may be due to the decreased availability of external financing in response to stronger debtor rights, an e ect amplified in industries with a high dependence on external financing. Hence, while it is typically assumed that stronger debtor protection encourages innovation by reducing the cost of failure for innovators, we show that it can instead dampen innovative activities by tightening the availability of external financing to innovative firms.

    Original languageEnglish (US)
    Pages (from-to)3311-3327
    Number of pages17
    JournalManagement Science
    Volume63
    Issue number10
    DOIs
    StatePublished - Oct 2017

    Keywords

    • Credit markets
    • Debtor protection
    • Innovation
    • Patents
    • Personal bankruptcy law
    • Small businesses

    ASJC Scopus subject areas

    • Strategy and Management
    • Management Science and Operations Research

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  • Cite this

    Cerqueiro, G., Hegde, D., Penas, M. F., & Seamans, R. C. (2017). Debtor rights, credit supply, and innovation. Management Science, 63(10), 3311-3327. https://doi.org/10.1287/mnsc.2016.2509