Keywords

bankruptcy, small businesses, behavioral firms, information frictions, stigma

Abstract

In an RCT with US small businesses, we document that a large share of firms are not well-informed about bankruptcy. Many assume that bankruptcy necessarily entails the death of a business and do not know about Chapter 11, where debts are renegotiated so that the business can continue operating. Firms also exhibit bankruptcy-related stigma, believing that bankruptcy is embarrassing, a sign of failure, and a negative signal to employees and customers. Short educational videos that address information or stigma increase knowledge and decrease stigma, both immediately and durably over 4 months. Videos increase reported interest in using Chapter 11 bankruptcy and increase intended debt and investment. However, we do not observe long-term real effects. Three years after the main RCT, we replicate our experiment on a totally different sample of larger firms, all of whom face substantial debt, and obtain the same results. A survey of bankruptcy attorneys and judges points to entrepreneurs’ overconfidence and, to a lesser extent, excessive perceived legal fees as first-order frictions explaining the limited real impact of treatments that only address information and stigma.

Original Publication Citation

“Life After Death: A Field Experiment with Small Businesses on Information Frictions, Stigma, and Bankruptcy,” with Shai Bernstein, Emanuele Colonnelli, and Mitch Hoffman.

Document Type

Working Paper

Publication Date

2023

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Associate Professor

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