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

Statistical Disparities in Capital Markets
Another issue is whether the racial differences in loan denial rates among firms with similar
characteristics can be attributed to differences in the geographic location of African American-
and nonminority-owned firms. If, for example, African American-owned firms are more likely to
be located in the central city, and a central city location is negatively correlated with profitability
and the ability to repay debt, then financial institutions may be acting optimally in rejecting the
loan applications of African American-owned firms at a higher rate. As indicated earlier, this
type of behavior is labeled “statistical discrimination.” In the subsequent text and tables, we
present a limited analysis to address whether or not this type of behavior takes place. 282
To identify whether lenders’ behavior is consistent with this hypothesis, we distinguish those
firms that self-classified their sales market as being local rather than regional, national, or
international. A central city location should have a greater impact on future profit expectations
for those firms that operate on a local level. If minority-owned firms are more likely to locate in
the central city, racial differences in loan approval rates should be greater in the firms that sell in
the local market area. The results of this test, reported in row numbers 9 and 10 of Table 6.10,
reject the hypothesis that differences in loan denial rates are attributable to different propensities
to locate in the center of a city. Estimates for the nation as a whole indicate that African
American-owned firms that sell to the local market are 21 percentage points more likely to have
their loan applications denied compared to a 19 percent excess denial rate for firms selling
primarily to regional, national, or international markets. These two figures are not significantly
different. In the ENC, the figures are statistically indistinguishable from those in the nation as a
whole.
In order to determine whether the findings for the ENC division were different from those for the
nation, in the second column of Table 6.10 we also report the coefficient and t-statistics on an
interaction term between the ENC division and African American ownership. In only one of 14
cases was the estimated coefficient on this interaction significant. There is, therefore, little
evidence that the figures for the ENC are significantly different from those in the nation as a
whole.
282 A strong test to distinguish between statistical discrimination and “Becker-Type” discrimination (referring to the
standard economic model of discrimination first expounded by University of Chicago economist Gary Becker)
would require a tremendous amount of detail about the specific location of the firm, characteristics of its
surrounding area, characteristics of neighboring firms, and the like, which were unavailable to us. As indicated
earlier, both forms of discrimination are illegal and this Chapter applies a definition that incorporates both.
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