Are minority-owned businesses underserved by financial markets? Evidence from the private-equity industry

Timothy Bates, William D. Bradford () and William E. Jackson ()
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William D. Bradford: University of Washington
William E. Jackson: University of Alabama

Small Business Economics, 2018, vol. 50, issue 3, No 3, 445-461

Abstract: Abstract Our study addresses a longstanding question—whether discrimination exists in financial markets. Although empirical evidence demonstrating disparate treatment of minorities is vast, studies have inadequately explained why minority customers seeking financing are targeted for discriminatory treatment. We develop a theoretical framework explaining why profit-maximizing capital suppliers may choose to offer minority clients worse terms than those provided to comparable white customers. Our framework stresses search costs and reservation prices. We then test this by comparing the relative profitability of investing private equity in minority- and white-owned small firms, an approach advocated by Gary Becker. Using three empirical tests, we consistently find the financial returns derived from investing in minority firms exceed those of white-firm investments. Conducting Becker’s test, in this instance, indicates that disparate treatment of minority clients does not result in loss of profitable investing opportunities for private equity funds but, instead, higher profits.

Keywords: Discrimination in financial markets; Financing minority-owned firms; Equity investing in small businesses (search for similar items in EconPapers)
JEL-codes: G24 L2 L89 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11187-017-9879-1

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