Corporate Governance

Bankruptcy "Reform" and Interference with the Capital Markets

By J. Robert Brown

The US bankruptcy laws were amended back in 2005 in an effort to make individual bankruptcy more difficult.  A short piece in the New Yorker, Going for Broke, examined the impact of the new law.  With the credit card industry the "driving force" behind the change, the article noted that the interest rates and fees "have not fallen as promised."  The most interesting part of the piece was the potential impact on entrepreneurial behavior.  As it noted:

• In the past, America's lenient attitude to bankruptcy encouraged entrepreneurship, by making it easy for people to start over if they failed.  (According to one study, in fact, more than fifteen per cent of personal bankruptcies are the result of failed business ventures.)  A paper by John Armour and Douglas Cumming has found a close correlation between the nature of a country's bankruptcy laws and its rate of self-employment:  the more liberal the laws, the more likely people are to start businesses and work for themselves. . .  That will probably mean that we end up with fewer business failures, but there'll also be fewer successes.

We hear a great deal on the impact of regulation on business behavior -- witness the continued controversy over the application of SOX Section 404(b) to smaller companies.  We hear a great deal less on the impact of tightened regulation on individuals and its impact on entrepreneurial behavior. 

Full post as published by The Race to the Bottom on April 09, 2008 (boomark / email).