Abstract
We develop a novel empirical test of racial bias based on comparisons between forward-looking, expectations-based credit scores and backward-looking, repayment-history-based credit scores. We then test for racial bias using confidential-access data from the Kauffman Firm Survey. Businesses founded by disadvantaged minorities have much lower average business credit scores, but these scores show no evidence of racial bias. If anything, forward-looking credit-score models under-predict the rate of payment delinquency among minority-owned businesses.
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Notes
Entry into entrepreneurship is positively related to increases in personal wealth, e.g., via bequest (Cagetti and de Nardi, 2006; Hurst and Lusardi, 2004) or external change in taxation rate (Nanda (2008), and with increased access to bank financing through deregulation and loosening of branching restrictions (Black and Strahan 2002).
For more information about the KFS survey design and methodology, please see Ballou et al. (2008). A public use dataset is available for download from the Kauffman Foundation’s website and a more detailed confidential dataset is available to researchers through a data enclave provided by the National Opinion Research Center (NORC). For more details about how to access these data see http://www1.kauffman.org/kfs.
We adopt the Robb and Robinson (2012) definition of outside debt, which includes business loans, personal loans from banks for the business, business credit cards, and business lines of credit. That is, our measure of outside debt includes bank debt that is issued to either the founder or the business itself. We do this to address the fact that in many instances banks require personal guarantees or collateral for business loans, which effectively blurs the distinction between the owner’s personal financial balance sheet and that of the firm. See Robb and Robinson (2012) for more details.
Outside equity includes venture capital, angel financing, and equity stakes owned by governments or other firms.
We also considered whether minority borrowers were more likely to be more than 30 days late (Paydex below 50) or less likely to pay on time (Paydex over 80) than would be suggested by the CCS score but found no evidence of this. Results are available upon request.
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Acknowledgements
This research was supported under grant SBAHQ-12-Q-0044 from the Small Business Administration. Certain data included herein are derived from the Kauffman Firm Survey release 6.0. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the Ewing Marion Kauffman Foundation. The authors wish to thank Tim Bates, Bill Bradford, Rob Seamans, and workshop participants at the Kauffman-sponsored MBE sessions at the 2016 AEA meetings and the 2016 AoM meetings. Jonathan Zandberg provided expert research assistance.
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Robb, A., Robinson, D.T. Testing for racial bias in business credit scores. Small Bus Econ 50, 429–443 (2018). https://doi.org/10.1007/s11187-017-9878-2
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DOI: https://doi.org/10.1007/s11187-017-9878-2