Bankruptcy and Insolvency Laws Could Drive Venture Capital Markets

Academics at Cambridge University have established a link between changes to legal and tax conditions and demand for venture capital from entrepreneurs.

(PRWEB) December 20, 2004 -- John Armour and Doug Cumming of the Centre of Business Research (CBR) say the link is true when applied to bankruptcy laws, and is as important a factor as economic conditions and buoyant capital markets. They say the finding is significant, given that it was thought previously that the depth and liquidity of the stock market was the overriding factor.

"Favourable tax and legal environments help the establishment of venture capital and private equity funds and increase the supply of capital," said a report produced by the pair. "Similarly, temperate bankruptcy laws stimulate entrepreneurialism and increase the demand for venture capital," they added.

For their study, Armour and Cumming carried out an international comparison of the legal and tax regimes in 15 countries over 13 years, and found that investor friendly regimes had a good supply of, and demand for, private equity. An investigation of each country's bankruptcy laws showed that those with tighter regimes, like in Germany where bankrupts must wait six years before starting again, there is significantly less demand for venture capital. The findings are particularly topical in the UK where insolvency laws were changed this month to allow 'honest bankrupts' the option of starting up again after 12 months, instead of three years previously.

One of the key aims of this and other reforms was to "aid rehabilitation and business start-ups and re-starts". "Many entrepreneurs rely on personal funds and credit - re-mortgaging their house, for example - to get their ideas off the ground before they have even got to the point of seeking venture capital," said the report. "If their ideas end in failure at this stage, some entrepreneurs will be put off from ever returning to the nation's talent pool."

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