Small Business Loan Turndowns, Personal Wealth and Discrimination

31 Pages Posted: 5 Sep 2003

See all articles by Ken S. Cavalluzzo

Ken S. Cavalluzzo

SVA Plumb Wealth Management, LLC

John D. Wolken

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May 2003

Abstract

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

Cavalluzzo, Ken and Wolken, John D., Small Business Loan Turndowns, Personal Wealth and Discrimination (May 2003). Available at SSRN: https://ssrn.com/abstract=333580 or http://dx.doi.org/10.2139/ssrn.333580

Ken Cavalluzzo (Contact Author)

SVA Plumb Wealth Management, LLC

18650 W Corporate Dr
#200
Brookfield, WI 53045
United States

John D. Wolken

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2503 (Phone)

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