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

Statistical Disparities in Capital Markets
framework of this model, a positive estimate of β3 is consistent with the presence of
discrimination. 261
2. 1993 NSSBF Data
The 1993 NSSBF data contain substantial information regarding credit availability on a
nationally representative target sample of for-profit, non-farm, non-financial business enterprises
with fewer than 500 employees. The survey was conducted during 1994 and 1995 for the Board
of Governors of the Federal Reserve System and the U.S. Small Business Administration; the
data relate to the years 1992 and 1993. The data file used here contains 4,637 firms. 262 In this
NSSBF file, minority-owned firms were over-sampled, but sampling weights are provided to
generate nationally representative estimates. Of the firms surveyed, 9.5 percent were owned by
African Americans, 6.4 percent were owned by Hispanics, and 7.4 percent were owned by
individuals of other races (i.e., Asians/Pacific Islanders, Native Americans). 263
Table 6.1 presents population-weighted sample means from these data for all firms in the sample
that applied for credit. The estimates indicate that African American-owned firms are almost 2.5
times more likely to have a loan application rejected as are non-Hispanic Nonminority-owned
firms (65.9 percent versus 26.9 percent). 264 Other minority groups are denied at rates higher than
nonminorities as well, but the magnitude of the African American/ nonminority differential is
especially striking.
Minority-owned firms, however, do have characteristics that are different from those of
nonminority-owned firms, and such differences may contribute to the gap in loan denial rates.
For instance, minority-owned firms were younger, smaller (whether measured in terms of sales
or employment), more likely to be located in urban areas, and more likely to have an owner with
fewer years of experience than their nonminority counterparts. Minority firms were also less
creditworthy, on average, than their nonminority counterparts, as measured by whether (a) the
owner had legal judgments against him or her over the previous three years, (b) the firm had
been delinquent for more than 60 days on business obligations over the preceding three years, or
(c) the owner had been delinquent for more than 60 days on personal obligations over the prior
three years. Additionally, compared to nonminority-owned firms, African American-owned
and Trost (1994) impose questionable exclusion restrictions, like omitting marital status from the loan supply
equation.
261 The Equal Credit Opportunity Act prohibits discrimination in access to credit by race and would apply to both
Becker-type and statistical discrimination.
262 The median size of firms in the sample was 5.5 and mean size was 31.6 full-time equivalent employees; 440
firms out of 4,637 had 100 or more full-time equivalent employees.
263 There were also two firms in the “Other race” category in 1993 that reported multiple or mixed race.
264 Cavalluzzo and Cavalluzzo (1998) examined these outcomes using the 1987 NSSBF and similarly found that
denial rates (weighted) are considerably higher for minorities. Nonminority-owned firms had a denial rate for
loans of 22 percent compared with 56 percent for African Americans, 36 percent for Hispanics, and 24 percent
for other races, which are broadly similar to the differences reported here. These estimates for minority groups
are estimated with less precision, however, because of the smaller number of minority-owned firms in the 1987
sample.
NERA Economic Consulting 188