The State of Minority- and Women- Owned ... - Cleveland.com

VI. Statistical Disparities in Capital Markets
A. Introduction
Statistical Disparities in Capital Markets
Discrimination occurs whenever the terms of a transaction are affected by personal
characteristics of the participants that are not relevant to the transaction. Among such
characteristics, the most commonly considered are race, ethnicity and gender. In labor markets,
this might translate into equally productive workers in similar jobs being paid different salaries
because of their race, ethnicity or gender. In credit markets, it might translate into loan approvals
differing across racial or gender groups with otherwise similar financial backgrounds.
In this Chapter, we examine whether there is evidence consistent with the presence of
discrimination in the small business credit market against minority-owned or women-owned
small businesses. Discrimination in the credit market against such businesses can have an
important effect on the likelihood that they will succeed. Moreover, discrimination in the credit
market might even prevent businesses from opening in the first place, might negatively impact
the size a firm could obtain, and/or shorten its longevity in the market. 252
In our analysis, we use data from the Federal Reserve Board to examine the existence or
otherwise of discrimination in the small business credit market for 1993, 1998 and 2003. These
surveys are based on a large representative sample of firms with fewer than 500 employees and
are administered by the Federal Reserve Board and the U.S. Small Business Administration. The
1993 and 1998 surveys deliberately oversampled minority-owned firms but the 2003 survey did
not. 253
These data provide qualitative and quantitative evidence consistent with the presence of
discrimination against minorities in the credit market for small businesses. For example, we find
that African American-owned firms are much more likely to report being seriously concerned
with credit market problems and report being less likely to apply for credit because they fear the
loan would be denied. Moreover, after controlling for a large number of characteristics of the
firms, we find that African American-owned firms, Hispanic-owned firms, and to a lesser extent
other minority-owned firms, are substantially and statistically significantly more likely to be
denied credit than are nonminority-owned firms. We find some evidence that women are
discriminated against in this market as well. The principal results are as follows:
252 Again, as noted in Chapter V, these factors also illustrate why, in a disparity study intended to answer the
question of whether discrimination is present in business enterprise, adjusting availability for “capacity” factors
such as firm age, firm size or firm revenues, is not a legitimate practice when there is evidence that suggests that
these factors themselves are tainted by discrimination. To do so would be to inappropriately introduce one or
more endogenous variables into the analysis.
253 The 2003 survey took other steps, however, to increase the likelihood that minority-owned and women-owned
firms were captured in the sampling frame. For more details, see National Opinion Research Center (2005),
p. 11.
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