Skip to main content
SpringerLink
Log in

Personal Insolvency Law and the Demand for Venture Capital

  • Articles
  • Published:
European Business Organization Law Review Aims and scope Submit manuscript

Abstract

Scholars working in the ‘law and finance ‘field have investigated empirically the links between various types of law and the incidence of venture capital finance. However, no study to date has systematically investigated the relationship between insolvency law — both personal and corporate — and venture capital finance. This paper argues that a nation’s personal insolvency law may have an important impact on the demand for venture capital finance, with more severe treatment of insolvents tending to reduce demand. This hypothesis is subjected to a preliminary test by comparing data on venture capital investment activity with an index of ‘severity’ of insolvency laws, and is not falsified. This finding will be of interest to policymakers, as a number of recent national and EU initiatives have sought explicitly to encourage innovative firms and venture capital finance.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Aghion, Phillipe, and Patrick Bolton. 1992. ‘An Incomplete Contracts Approach to Financial Contracting’, 59 Review of Economic Studies 473–494.

    Article  Google Scholar 

  • American Bankruptcy Institute. 2002. ‘Major Effects of the Consumer Bankruptcy Provisions of the 2002 Bankruptcy Legislation’, available at: <http://www.abiworld.org/table.pdf>.

  • Armour, John. 2003. ‘Law, Finance and Innovation: A Review’, in J.A. McCahery and L. Renneboog (eds.) Venture Capital Contracting and the Valuation of Hi-Tech Firms (Oxford: Oxford University Press), 133–161.

    Google Scholar 

  • Armour, John and Cumming, Douglas C. 2004. ‘The Legal Road to Replicating Silicon Valley’ CBR Working Paper No. 284 (March 2004), available at: <www.cbr.cam.ac.uk/publications/index.htm>.

  • Baird, Douglas G., and Picker, Randal C. 1991. ‘A Simple Noncooperative Bargaining Model of Corporate Reorganizations’, 20 Journal of Legal Studies 311.

    Article  Google Scholar 

  • Baygan, Günseli andMichael Freudenberg. 2000. ‘The Internationalisation of Venture Capital Activity in OECD Countries: Implications for Measurement and Policy’, OECD STI Working Paper 2000/7.

  • Bebchuk, Lucian Ayre, and Chang, Howard. 1992. ‘Bargaining and the Division of Value in Corporate Reorganization’, 8 Journal of Law, Economics, and Organization 253–279.

    Google Scholar 

  • Bell, J., Boyron, S. and Whittaker, S. 1998. Principles of French Law (Oxford: OUP).

    Google Scholar 

  • Berger, Allen N. and Gregory F. Udell. 1998. ‘The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycles’, 22 Journal of Banking & Finance 613–673.

    Article  Google Scholar 

  • Black, Bernard S. 2001. ‘Does Corporate Governance Matter? A Crude Test Using Russian Data’ 149 University of Pennsylvania Law Review 2131–2150.

    Article  Google Scholar 

  • Black, Bernard S., and Ronald J. Gilson. 1998. ‘Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets’ 47 Journal of Financial Economics 243–277.

    Article  Google Scholar 

  • Bratton, William W. 2002. ‘Venture Capital on the Downside: Preferred Stock and Corporate Control’, 100 Michigan Law Review 891–945.

    Article  Google Scholar 

  • Cappiello, S. 2002. ‘Bankruptcy Procedures in Italy’ 13 International Company and Commercial Law Review 260–265.

    Google Scholar 

  • Carpenter, R.E. and B.C. Petersen. 2002. ‘Capital Market Imperfections, High-Tech Investment, and New Equity Financing’ 112 Economic Journal F54–F72.

    Article  Google Scholar 

  • Cherubini, G. 2000. ‘Bankruptcy Reform in Italy’, Eurofenix October 2000, 13.

  • Corcoran, Elizabeth. 2002. ‘Digital Diaspora; From the Internet wreckage, the Spirit of Silicon Valley Emerges’, 169(4) Forbes.

  • Cremades, B.M. 1992. Business Law in Spain, 2nd edn. (London, Butterworths).

    Google Scholar 

  • Cumming, Douglas J. and Jeffrey G. Macintosh. 2002. ‘Crowding Out Private Equity: Canadian Evidence’ working paper, University of Toronto Law School/University of Alberta Business School, available at: <www.ssrn.com>.

  • Czarnetzky, John M. 2000. ‘The Individual and Failure: A Theory of the Bankruptcy Discharge’ 32 Arizona State Law Journal 393–464.

    Google Scholar 

  • Dalloz. 1955-. Dalloz Encyclopédie Juridique: Répertoire de Procédure Civile et Commerciale (Paris: Dalloz).

    Google Scholar 

  • Department of Trade and Industry (UK). 2001. Productivity and Enterprise: Insolvency — A Second Chance (London, TSO).

    Google Scholar 

  • Dirix, E. 2001. ‘Bankruptcy Arrangements: The Belgian Case’, in Vriesendorp, R.D., McCahery, J. A. and Verstijlen, F.M.J. (eds.), Comparative and International Perspectives on Bankruptcy Law Reform in the Netherlands (The Hague: Boom Juridische Uitgevers), 171–182.

    Google Scholar 

  • European Commission. 1998. Risk Capital: A Key to Job Creation in the European Union, Brussels 31 March 1998, SEC (1998)552 final.

  • European Commission. 2000. Progress Report on the Risk Capital Action Plan, Brussels 18 Oct 2000, COM (2000) 658 final.

  • European Commission (DG Enterprise) Expert Group. 2003. Best Project on Restructuring, Bankruptcy and a Fresh Start: Final Report (Brussels).

  • EVCA (European Private Equity and Venture Capital Association). 1998-. EVCA Yearbooks (Bruges: EVCA).

    Google Scholar 

  • Fan, Wei and Michelle J. White. 2000. ‘Personal Bankruptcy and the Level of Entrepreneurial Activity’, working paper, University of Michigan.

  • Fletcher, Ian F 2003. The Law of Insolvency, 3rd edn. (London: Sweet & Maxwell).

    Google Scholar 

  • Freedman, Judith, and Michael Godwin. 1994. ‘Incorporating the Micro Business: Perceptions and Misperceptions’, in Alan Hughes and Donald J. Storey, Finance and the Small Firm (London: Routledge. 232.

    Google Scholar 

  • Gangopadhyay, Shubhashis, and Wihlborg, Clas. 2001. ‘The Impact of Bankruptcy Rules on Risky Project Choice and Skill Formation under Credit Rationing’, working paper available on SSRN.

  • Gebhard, Robert S. 2000. ‘Dot-com Bankruptcies: A Preview from Silicon Valley?’, 19 American Bankruptcy Institute Journal 6.

    Google Scholar 

  • Georgellis, Y., and Wall, H.J. 2002. ‘Entrepreneurship and the policy environment’ Federal Reserve Bank of St. Louis Working Paper 2002-019A. <http://reseach.stlouisfed.org/wp/2002/2002-019.pdf>.

  • Georgokopoulos, Nicholas L. 2002. ‘Bankruptcy Law for Productivity’ 37 Wake Forest Law Review 51–95.

    Google Scholar 

  • Gilson, Ronald J., and David M. Schizer. 2003. ‘Understanding Venture Capital Structure: A Tax Explanation for Convertible Preferred Stock’ 116 Harvard law Review 874–916.

    Article  Google Scholar 

  • Gompers, Paul A. and Josh Lerner. 1999. The Venture Capital Cycle (Cambridge, MA: MIT Press).

    Google Scholar 

  • Gompers, Paul A. and Josh Lerner. 2000. ‘What Drives Venture Capital Fundraising?’ NBER Working Paper 6906.

  • Gompers, Paul A. and Josh Lerner. 2001. ‘The Venture Capital Revolution’, 15(2) Journal of Economic Perspectives 145–168.

    Article  Google Scholar 

  • Gonzalez, Ignacio Guillen, undated. ‘Spanish Insolvency Law’, available at: <www.multilaw.com>.

  • Hagg, M. 1997. ‘Sweden: Insolvency Procedures’ 8 International Company and Commercial Law Review C20–C21.

    Google Scholar 

  • Hallinan, Charles G. 1986. ‘The ‘Fresh Start’ Policy in Consumer Bankruptcy: A Historical Inventory and an Interpretative Theory’ 21 University of Richmond Law Review 49–160.

    Google Scholar 

  • Hart, Oliver. 1995. Firms, Contracts and Financial Structure (Oxford: Clarendon Press).

    Book  Google Scholar 

  • Hicks, Andrew, Robert Drury and Janet Smallcombe. 1995. Alternative Company Structures for the Small Business, ACCA Research Report (London: Certified Accountants Educational Trust).

    Google Scholar 

  • INSOL Europe (eds.). undated. Technical Releases: Insolvency Systems in Europe <http://www.insol-europe.org/member_forum.htm>.

  • Jackson, Thomas H. 1985. ‘The Fresh-Start Policy in Bankruptcy Law’ 98 Harvard law Review 1393–1448.

    Article  Google Scholar 

  • Jeng, Leslie A. and Wells, Philippe C. 2000. ‘The Determinants of Venture Capital Funding: Evidence Across Countries’ 6 Journal of Corporate Finance 241–289.

    Article  Google Scholar 

  • Jensen, Michael C, and William H. Meckling. 1976. ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’, 3 Journal of Financial Economics 305–360.

    Article  Google Scholar 

  • Klausner, Michael and Kate Litvak. 2001. ‘What Economists Have Taught US About Venture Capital Contracting’, in Michael J. Whincop (ed.), Bridging the Entrepreneurial Finance Gap: Linking Governance with Regulatory Policy (Aldershot: Ashgate), 54–74.

    Google Scholar 

  • Koral, R.L. and Sordino, M.-C. 1996. ‘The New Bankruptcy Reorganization Law in France: Ten Years Later’ 70 American bankruptcy Law Journal 437–458.

    Google Scholar 

  • Kortum, S., and J. Lerner. 2000. ‘Assessing the contribution of venture capital to innovation’ 31 RAND Journal of Economics 647–692.

    Article  Google Scholar 

  • La Porta, Rafael, Lopes-de-Silanes, Florencio, Shleifer, Andrei and Vishny, Robert W.,. 1997. ‘Law and Finance’, 52 Journal of Finance 1131–1150.

    Article  Google Scholar 

  • Mayer, Colin. 2001. ‘Institutional Investment and Private Equity in the UK’, Oxford University Saïd Business School Working Paper 2001-FE-10.

  • Myers, Stewart C, and Nicholas S. Majluf. 1984. ‘Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have’, 13 Journal of Financial Economics 187–221.

    Article  Google Scholar 

  • Paulus, C.G. 2001. ‘Germany: Lessons to Learn from the Implementation of a New Insolvency Code’, 17 Connecticut Journal of International Law 89–98.

    Google Scholar 

  • Philippe & Partners. 2002. Bankruptcy and a Fresh Start: Stigma on Failure and Legal Consequences of Bankruptcy, Study Prepared for European Commission (Brussels).

  • Raaijmakers, Theo. 2001. ‘Towards a Further Revision of Dutch Insolvency Law’, in R.D. Vriesendorp, J.A. McCahery and F.M.J. Verstijlen (eds.), Comparative and International Perspectives on Bankruptcy Law Reform in the Netherlands (The Hague: Boom Juridische uitgevers), 3–12.

    Google Scholar 

  • Sanfey, Mark and Holohan, Bill. 1991), Bankruptcy Law and Practice in Ireland (Dublin: Round Hall Press).

    Google Scholar 

  • Schiller, C. 2002. ‘Three Years of Insolvency Plans in Germany’, Eurofenix March 2002, 4–5.

  • SJ Berwin (eds.). 2002. Bankruptcy and Insolvency: EVCA Tax & Legal Committee Special Paper (Zaventum: EVCA).

    Google Scholar 

  • Small Business Service (SBS). 2001. Think Small First (London: SBS).

    Google Scholar 

  • Sorenson, A. and Omar, P.J. 1996. Corporate Rescue Procedures in France (London, Kluwer Law International).

    Google Scholar 

  • Tabb, Charles Jordan. 1997. The Law of Bankruptcy (Westbury, NY: Foundation Press).

    Google Scholar 

  • Tykvová, T. 2000. Venture capital in Germany and its impact on innovation. Working paper, Centre for European Economic Research (ZEW), University of Mannheim (available from SSRN).

  • Triantis, G.G. 2001. ‘Financial Contract Design in the World of Venture Capital’, 68 University of Chicago Law Review 305–323.

    Article  Google Scholar 

  • Vermeulen, Erik. 2001. ‘Towards a New ‘Company’ Structure for High-Tech Start-Ups in Europe’, working paper, Tilburg University Centre for Company Law (available from SSRN).

  • Wessels, Bob. 1999. Business and Bankruptcy Law in the Netherlands (The Hague: Kluwer Law International).

    Google Scholar 

  • Wood, Phillip. 1995. Principles of International Insolvency (London: Sweet & Maxwell).

    Google Scholar 

  • Wood, P. and Totty, P.G. (eds.). 1994. Butterworths International Insolvency Laws (London: Butterworths).

    Google Scholar 

  • Ziechmann, P. 1997. ‘Business Bankruptcy in Germany’ American Bankruptcy Institute Journal 16 February 1997, 10.

Download references

Author information

Authors and Affiliations

  1. University of Cambridge, USA

    John Armour (Faculty of Law and Centre for Business Research)

Authors
  1. John Armour
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Armour, J. Personal Insolvency Law and the Demand for Venture Capital. Eur Bus Org Law Rev 5, 87–118 (2004). https://doi.org/10.1017/S1566752904000874

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1017/S1566752904000874

Keywords

Search

Navigation