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

(2) Ii = β0 + β1CWi + β2Xi + β3Ri + β4LCi + εi,
Statistical Disparities in Capital Markets
where I represents the interest rate charged on the loan, LC represents characteristics of the loan
(see the notes to Table 6.8 for a full list of the variables included in this set), εi is a term
capturing random factors, and all other notations are the same as in equation (1).
An important consideration is whether the interest rate may be treated as exogenous, as our
reduced form model assumes. In the context of small business loans, in which it is possible that
the loan terms may be negotiated in the determination process, this assumption may not be valid.
As such, a model that simultaneously estimates the interest rate and the loan decision might be
appropriate, except that the interest rate that would be charged to firms whose loans were denied
is not available in our data. Alternatively, one could estimate an interest rate model alone for
those firms whose loan was approved, adjusting for the potential bias brought about by sample
selection. To properly identify such a model, however, a variable is required that is linked to the
loan denial decision, but unrelated to the level of interest charged on approved loans; no such
variable exists in the data.
Nevertheless, one would expect these considerations to impose a downward bias on the
estimated differential in interest rates charged on loans to African American-owned firms. Those
firms whose loans were rejected would have been charged higher interest rates than those
approved. Since African American-owned businesses were considerably more likely to be
rejected holding constant differences in creditworthiness, one would expect any differential in
interest rate to be even greater if those firms were included in the sample. We overlook this
implication in the results reported below, but its impact should be kept in mind.
The results obtained from estimating equation (2) are reported in Row 1 of Table 6.13, which
includes the complete set of control variables comparable to those in Column 5 of Table 6.8.
Estimates indicated that African American-owned firms pay rates of interest that are roughly one
percent (100 basis points) higher than similarly situated nonminority-owned firms. Row 2 shows
that even African American-owned firms with good credit histories are charged higher interest
rates relative to nonminority-owned firms. 285 There is some evidence of this phenomenon
affecting Hispanic-owned firms as well.
The remainder of the table presents similar specification checks to those reported in Table 6.10.
Recall that most of these models identify firms for which the firm’s own history is likely to be a
more important contributor to its creditworthiness. The specifications by sales market are
designed to distinguish the impact of central city location. Unfortunately, sample sizes are
smaller in these specifications and reduce the power of the analysis. Nevertheless, we still find
that regardless of organization type and firm age, African American-owned firms face
statistically significantly higher interest rates. Overall, the evidence presented indicates that
African Americans, and to a lesser extent Hispanics and Asians/Pacific Islanders, face
disadvantages in the market for small business credit that do not appear to be attributable to
differences in geography or creditworthiness.
285 Estimates from firms that have had past credit problems are not presented since the higher likelihood of their
being denied credit restricts the size of the sample and limits the ability to provide a powerful test of the interest
rates charged if they are approved.
NERA Economic Consulting 207