The Impact of Enhanced Creditor Rights on Startups : Evidence from the Uniform Fraudulent Transfer Act

This study examines the impact of the Uniform Fraudulent Transfer Act (UFTA) on venture capital (VC) investment, innovation activity, successful exit, and financial distress of entrepreneur entities. The UFTA mainly contributes to eliminating the burden of proof against fraudulent transfer intent needed for creditors to undo asset transfers from distressed firms. To understand how the change in fraudulent transfer law is critical for entrepreneurs, this study investigates how the UFTA related increase in creditor rights and reorganization costs impact VC investment and startups. Under the difference-in-differences framework, the results show that the UFTA facilitates the VC's ability to obtain more capital to make additional investments for longer periods in local startups. However, the startups become more risk-averse and the average quality of VC investment declines, which leads to a deterioration in the performance of local startups in terms of innovation and successful exit through initial public offerings. The UFTA contributes to increasing the cost of financial distress for local startups and makes them less likely to file bankruptcy, especially in the form of in-court restructuring