Seminar «Black Entrepreneurs, Firm Size and Financial Constraints»

IZA-HSE University International Labor Seminar was held on January 28, 2021.

Speaker: John S. Earle (George Mason University and IZA).

Title: Black Entrepreneurs, Firm Size and Financial Constraints.

Black-owned firms tend to be smaller and operate with less finance than those owned by whites. We document these facts and connect them by analyzing several types of evidence for black-owned compared to white-owned businesses: the reported amounts and sources of finance at start-up and in a recent year, the subjective evaluations of business owners on their constraints, the degree to which the reported financial measures are associated with firm size, and the causal effect of the Community Reinvestment Act (CRA) on firm size. We find that black-owned businesses tend to start with less finance, but the difference from white-owned businesses narrows once they are going concerns. Financial sources differ in that black-owned firms are less likely to receive bank loans either at start-up or later in their life cycle. Black business owners are also much more likely to refrain from applying for loans because they expect to be denied and to report that lack of financial access reduces their profitability. Concerning size, black-owned businesses tend to have slightly fewer employees than those owned by whites, on average, but the difference disappears when controlling for firm age, as black-owned firms tend to be younger. While the size difference remains negligible with a wealth of other controls - including other demographics, human capital, and measures of entrepreneurial motivations - it shifts when financial variables are included: the results imply that with the same level of financial access black-owned businesses hire on average 7 percent more employees than firms owned by whites. Finally, exploiting the assignment to CRA treatment based on a census tract-level income threshold and changes in the assignment with a combined regression discontinuity and difference-in-differences design, we find that black-owned businesses grow 5-7 percent more than white-owned businesses in treated neighborhoods. Co-authors: Mee Jung Kim, Kyung Min Lee, J. David Brown.

Discussant: Mark E. Schaffer (Heriot-Watt University and IZA).