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

Statistical Disparities in Capital Markets
The Negro businessman … encounters greater difficulties than whites in securing credit.
This is partly due to the marginal position of Negro business. It is also partly due to
prejudicial opinions among whites concerning business ability and personal reliability of
Negroes. In either case a vicious circle is in operation keeping Negro business down.” 258
Bates goes on to argue that commercial banks lend most easily to nonminority males who
possess significant amounts of equity capital to invest in their businesses (Bates, 1991a). Apart
from banks, an important source of debt capital for small business is likely to be family and
friends, but the low wealth of African American households reduces the availability of debt
capital that family and friends could invest in small business operations (Bates, 1993; Bates,
1991b).
Additional evidence indicates that capital constraints for African American-owned businesses are
particularly large. For instance, Bates (1989) finds that racial differences in levels of financial
capital do have a significant effect upon racial patterns in business failure rates. Fairlie and
Meyer (1996) find that racial groups with higher levels of unearned income have higher levels of
self-employment. In an important paper, Fairlie (1999) uses data from the 1968-1989 Panel
Study of Income Dynamics to examine why African American men are one-third as likely to be
self-employed as nonminority men. The author finds that the large discrepancy is due to an
African American transition rate into self-employment that is approximately one half the
nonminority rate and an African American transition rate out of self-employment that is twice
the nonminority rate. He finds that capital constraints—measured by interest income and lumpsum
cash payments—significantly reduce the flow into self-employment from wage/salary work,
with this effect being nearly seven times larger for self-employed African Americans than for
nonminority self-employed persons. Fairlie then attempts to decompose the racial gap in the
transition rate into self-employment into a part due to differences in the distributions of
individual characteristics and a part due to differences in the processes generating the transitions.
He finds that differences in the distributions of characteristics between African Americans and
non-minorities explain only a part of the racial gap in the transition rate into self-employment. In
addition, racial differences in specific variables, such as levels of assets and the likelihood of
having a self-employed father provide important contributions to the gap. He concludes,
however, that “the remaining part of the gap is large and is due to racial differences in the
coefficients. Unfortunately, we know much less about the causes of these differences. They may
be partly caused by lending or consumer discrimination against blacks” (1999, p. 14).
There is also research into racial differences in access to credit among small businesses.
Cavalluzzo and Cavalluzzo (1998) use data from the 1988-1989 National Survey of Small
Business Finances (NSSBF), conducted by the Board of Governors of the Federal Reserve
System, to analyze differences in application rates, denial rates, and other outcomes by race,
ethnicity and gender in a manner similar to the econometric models reported in this Study. This
paper documents that a large discrepancy exists in credit access between non-minorities and
minority-owned firms that cannot be explained by a handful of firm characteristics.
Unfortunately, the earlier NSSBF data did not over-sample minority-owned firms and included
limited information on a firm’s credit history and that of its owner, reducing the ability to
258 G. Myrdal (1944, p. 308).
NERA Economic Consulting 186