Small Business Loan Turndowns, Personal Wealth and Discrimination
31 Pages Posted: 5 Sep 2003
Date Written: May 2003
Extant literature finds large differences in loan denials between small firms owned by whites and other demographic groups. However, none of this literature focuses on the business owner's personal wealth, despite it being a potentially important part of the small business lending decision. We use newly available data to examine the role of personal wealth on small business loan turndowns, given the firm applied for credit, across demographic groups. We also provide a quantitative assessment of the impact of differences in personal wealth, as well as in the endowments of other key variables in the lending decision, on the differences in denial rates across race. We find that greater personal wealth is associated with a lower probability of loan denial. But personal wealth plays only a modest role in explaining the differences in African American- and white-owned denial rates. Differences in credit history explain most of the endowment effect between African Americans and whites. In contrast, variation in personal wealth accounts for a more substantial part of the difference in denial rates between Hispanic-/Asian-owned businesses and white-owned firms. However, even after controlling for personal wealth, large differences in denial rates across demographic groups remain.
JEL Classification: J71, D40
Suggested Citation: Suggested Citation