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Small Business Loan Turndowns, Personal Wealth, and Discrimination

  • Ken Cavalluzzo

    (Wisconsin Capital Management)

  • John Wolken

    (Board of Governors of the Federal Reserve System)

We examine the impact of personal wealth on small business loan turndowns across demographic groups. Information on home ownership, home equity, and personal net worth, in combination with a rich set of explanatory variables, furthers our understanding of the credit market experiences of small businesses across demographic groups. We find substantial unexplained differences in denial rates between African-American-, Hispanic-, Asian-, and white-owned firms. We find that greater personal wealth is associated with a lower probability of loan denial. However, even after controlling for personal wealth, large differences in denial rates across demographic groups remain.

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Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 6 (November)
Pages: 2153-2178

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Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:6:p:2153-2178
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  1. David G. Blanchflower & Phillip B. Levine & David J. Zimmerman, 2003. "Discrimination in the Small-Business Credit Market," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 930-943, November.
  2. Cavalluzzo, Ken S & Cavalluzzo, Linda C, 1998. "Market Structure and Discrimination: The Case of Small Businesses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 771-92, November.
  3. Fairlie, Robert W, 1999. "The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 80-108, January.
  4. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
  5. Avery, Robert B. & Bostic, Raphael W. & Samolyk, Katherine A., 1998. "The role of personal wealth in small business finance," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 1019-1061, August.
  6. Timothy Bates, 1999. "Available evidence indicates that black-owned firms are often denied equal access to credit," Proceedings 758, Federal Reserve Bank of Chicago.
  7. Ken S. Cavalluzzo, 2002. "Competition, Small Business Financing, and Discrimination: Evidence from a New Survey," The Journal of Business, University of Chicago Press, vol. 75(4), pages 641-680, October.
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  9. Ken Cavalluzzo & Linda Cavalluzzo & John Wolken, 1999. "Competition, small business financing, and discrimination: evidence from a new survey," Finance and Economics Discussion Series 1999-25, Board of Governors of the Federal Reserve System (U.S.).
  10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  11. Robert B. Avery, 1999. "Access to credit for minority-owned businesses," Proceedings 759, Federal Reserve Bank of Chicago.
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