Size Matters: The Impact of Loan Size on Measures of Disparate Treatment toward Minority Entrepreneurs in the Small Firm Credit Market
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William E. Jackson
,
Louis Marino
Abstract
This paper reports the results of investigating differences in measures of disparate treatment, or discrimination, in the small firm credit market that are related to loan size. Because small loans tend to be less profitable to originate than large loans, the competitive nature of the product markets for large and small loans may be quite different. Becker suggests that more competition will reduce the level of discrimination in a market. And some market-based evidence of Becker’s competition effect has been reported in the literature on discrimination in the small firm credit market. We add to this literature by considering the impact of differing levels of competition across products (i.e. small versus large loans). The results for our small loan subsample exhibit strong evidence of disparate treatment, or discrimination, against African-American entrepreneurs. However, the results for the large loan subsample are statistically different. In particular, for the large loan subsample there is no significant evidence of discrimination, or disparate treatment, against African-American entrepreneurs applying for business loans. This strongly suggests that the current evidence of discrimination in the small firm credit market needs to be reconsidered for public policy application purposes.
Appendix: Notes for Tables 5, 6, 7, 10, and 11
Model 2 – Credit worthiness and education of the firm’s principal owner: The credit worthiness variables include whether or not the firm has been delinquent on a personal or business loan, whether the business owner has declared bankruptcy in the past 7 years, whether there have been any judgments against the business owner, firm’s sales, profits, assets, and liabilities, business owner’s years of business experience, and the percentage of the firm owned by the principal owner.
Model 3 – Credit score: Information provided by independent organizations on FICO score of the principal owner or similar measures for the firm.
Model 4 – Other firm characteristics and loan size: These include variables such as firm age, number of employees in 1998, and five dummy variables related to the type of organization (e.g. partnership, S-corporation, C-corporation.) There is also a set of four dummy variables included to determine whether the firm’s market is regional, national or international. The only loan characteristic variable included in this category for the 1998 SSBF is size of the loan sought.
Models 5, 6, and 7 – The variables for these models are explained in the tables.
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Articles in the same Issue
- Competitive Research Articles
- Where Do Accelerators Fit in the Venture Creation Pipeline? Different Values Brought by Different Types of Accelerators
- Size Matters: The Impact of Loan Size on Measures of Disparate Treatment toward Minority Entrepreneurs in the Small Firm Credit Market
- The Influence of Entrepreneurial Orientation on Types of Process Innovation Capabilities and Moderating Role of Social Capital
- Comparative Entrepreneurship between Western Europe and Latin America
Articles in the same Issue
- Competitive Research Articles
- Where Do Accelerators Fit in the Venture Creation Pipeline? Different Values Brought by Different Types of Accelerators
- Size Matters: The Impact of Loan Size on Measures of Disparate Treatment toward Minority Entrepreneurs in the Small Firm Credit Market
- The Influence of Entrepreneurial Orientation on Types of Process Innovation Capabilities and Moderating Role of Social Capital
- Comparative Entrepreneurship between Western Europe and Latin America
