Bankruptcy Laws and Entrepreneurship: The Moderating Effects of Culture and Environmental Munificence

Stringent bankruptcy laws are generally understood to increase the costs of failure and thus not conducive for entrepreneurship. However, the relationship between bankruptcy laws and entrepreneurial activity may be more nuanced than implied by previous work. In particular, the cultural context within which bankruptcy occurs, and the nature of the environment facing entrepreneurs could each impact the relationship between bankruptcy laws and the level of entrepreneurial activity. In this paper, theory is developed exploring these relationships. A unique dataset is compiled that tracks changes in bankruptcy laws from 1995-2008 in about 33 different countries from their legal documents and a wide range of economic and cultural variables from several different sources, i.e., International Labor organization, World Bank, Economic Freedom of the World Indices, etc. The hypotheses regarding the differences in bankruptcy laws and levels of entrepreneurial activity within and across different cultural and environmental contexts are tested using the ‘difference-in-differences’ method with this dataset. Results show that there are significant differences in the impact of bankruptcy laws and bankruptcy law changes across different cultural and environmental contexts.