Racial Disparities in Small Business Lending

47 Pages Posted: 7 Apr 2021 Last revised: 23 Jun 2021

See all articles by Tao Chen

Tao Chen

Nanyang Business School, Nanyang Technological University

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Bo Sun

University of Virginia Darden School of Business

Date Written: April 7, 2021

Abstract

We study the magnitude and nature of racial disparities in the U.S. small business credit market. Exploiting a unique dataset containing rich loan contract information, including firm and lender characteristics, we document sizable racial differentials in small business lending, measured by loan denial rates and interest rates between black-owned businesses and otherwise observationally identical white-owned businesses. Such racial disparities are most pronounced in areas associated with severe racial bias against blacks. Critically, we show that an exogenous increase in bank competition due to bank deregulation has a quantitatively large effect in reducing racial disparities in small business lending, and such a reduction is primarily driven by entrant banks, as the Becker (1957) theory of racial prejudice predicts.

Keywords: Racial disparities, Small business lending, Banking deregulation

JEL Classification: G21, G32, G3

Suggested Citation

Chen, Tao and Lin, Chen and Sun, Bo, Racial Disparities in Small Business Lending (April 7, 2021). Nanyang Business School Research Paper No. 21-11, Available at SSRN: https://ssrn.com/abstract=3821442 or http://dx.doi.org/10.2139/ssrn.3821442

Tao Chen (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Bo Sun

University of Virginia Darden School of Business ( email )

100 Darden Blvd
K, VA 22903
United States
8622453813 (Phone)

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