The flip side of the coin: how entrepreneurship-oriented insolvency laws can complicate access to debt financing for growth firms

Abstract

This study examines the impact of the change towards a more debtor-friendly insolvency law on debt financing of growth firms. Prior studies rarely consider that insolvency laws not only impact entrepreneurship but can also impact the relationship between the firm and its various stakeholders. We consider the impact on the relationship with the key stakeholders of the firm, namely its creditors. Using the recent change in Belgian insolvency law as an exogenous policy shock, we investigate the changes in the use of debt for growth firms, considering the heterogeneity of debt. Our findings indicate that the financing mix for growth companies has altered after the change towards a more debtor-friendly insolvency law: they seem to be less likely to receive financing from financial institutions and trade creditors. However, we found that payments to the government and employees are delayed after the change, probably to compensate for this lack of debt financing.