THE 1986 UK INSOLVENCY AND COMPANY DIRECTORS DISQUALIFICATION ACTS - AN EVALUATION OF THEIR IMPACTS UPON SMALL FIRM FINANCING DECISIONS

The paper examines the potential impact of the 1986 U.K. Insolvency an d Company Directors' Disqualification Acts on small firm financing dec isions. With the aid of a simplified Black and Scholes (1973) option m odel of financing decisions, the paper illustrates how the 1986 legisl ation reduces the incentives for owner-managers to gamble with credito r claims, particularly in situations of financial distress, by making them personally liable for unmet claims and/or by disqualifying them f rom holding office for a fixed period. For instance, example 3 in the paper shows the conflict that could result from the owner-manager redu cing his/her opening equity position and it further argues how the leg islation should act to alleviate the situation. It remains, however, a n empirical question as to whether this reduction in creditors' exposu re to the risk of uncompensated wealth transfers will ultimately resul t in a significantly greater number of company liquidations and disqua lifications, particularly during a prolonged economic downturn, or an improved/less costly supply of finance to small firms.