Access to Financing and Racial Pay Gap Inside Firms

How does access to financing influence racial pay inequality inside firms? We answer this question using the employer-employee matched data administered by the U.S. Census Bureau and detailed resume data recording workers� career trajectories. Exploiting exogenous shocks to firms� debt capacity, we find that better access to debt financing significantly narrows the earnings gap between minority and white workers. Minority workers experience a persistent increase in earnings and also a rise in the pay rank relative to white workers in the same firm. The effect is more pronounced among mid- and high-skill minority workers, in areas where white workers are in shorter supply, and for firms with ex-ante less diverse boards and greater pre-existing racial inequality. With better access to financing, minority workers are also more likely to be promoted or be reassigned to technology-oriented occupations compared to white workers. Our evidence is consistent with access to financing making firms better utilize minority workers� human capital.