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

Statistical Disparities in Capital Markets
difficulties and to determine the personal collateral available should the firm default on its
obligation. We do have measures of the owner’s human capital in the form of education and
experience, which likely capture at least some of the differential in available personal wealth
across firm owners. Nevertheless, our potentially incomplete characterization of the business
owner’s personal financial condition in the 1993 NSSBF dataset may introduce a bias into our
analysis if African American business owners have fewer resources than nonminority business
owners. As we will see below, however, and as noted in the previous footnote, this deficiency is
rectified in the 1998 and 2003 SSBF datasets, with little change in the main findings.
To assess the potential impact of this problem on our results, we separately examined groups of
firms who differ in the degree to which personal finances should influence the loan decision and
compare the estimated disadvantage experienced by African American-owned firms in different
groups. First, we examine proprietorships and partnerships separately from corporations since
owners of incorporated businesses are at least somewhat shielded from incurring the costs of a
failed business. Second, we divide firms according to size. 280 Both larger small businesses and
those that have been in existence for some time are more likely to rely on the business’s funds,
rather than the owner’s, to repay its obligations. Third, we consider firms that have applied for
loans to obtain working capital separately from those firms that seek funds for other purposes
(mainly to purchase vehicles, machinery and equipment, and buildings or land). Loans made for
one of these other purposes are at least partially collateralized because the financial institution
could sell them, albeit at a potentially somewhat reduced rate, should the small business
default. 281
Results from these analyses provide no indication that omitting the owner’s personal wealth
substantially biases the results presented above in Tables 6.8 and 6.9. Estimates presented in row
numbers 1 through 8 of Table 6.10 indicate that African American-owned small businesses are
significantly more likely to have their loan applications rejected regardless of the category of
firm considered. In particular, when samples are restricted to corporations, larger firms, and
firms seeking credit for uses other than working capital, African American-owned firms are 21,
20, and 15 percentage points more likely, respectively, to have their loan application rejected
even though personal resources should be less important in these categories. Moreover, in each
group where there are two types of firms (large and small, etc.), the estimates for the two types
of firms are not significantly different from each other.
280 As reported earlier, the mean and median size of firms is 5.5 and 31.6 full-time equivalent workers, respectively.
Fourteen percent of firms have one or fewer employees and 27 percent have two or fewer employees. In the
ENC, the mean and median size of firms is 6.0 and 34.3 full-time equivalent workers, respectively. Twelve
percent of firms have one or fewer employees and 26 percent have two or fewer employees.
281 As indicated earlier, greater personal wealth may improve a small business’s chances of obtaining credit because
it provides collateral should the loan go bad and because wealthy owners can use their own resources to weather
bad times, improving the likelihood of repayment. Our separate analysis of corporations and proprietorships and
of large and small firms does not account for this second reason because corporations and large businesses may
still need to draw on the owner’s personal wealth to help it survive short-term shocks. Businesses that have been
in existence for several years, however, are less likely to experience these shocks, making them less likely to
require infusions from the owner’s personal wealth. A loan used to purchase equipment that can be sold if the
firm defaults similarly insulates the bank from the need to seek repayment directly from the owner.
NERA Economic Consulting 202