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Access to capital and small business growth: evidence from CRA loans data

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Abstract

In this paper, we use geographic and time variation of the Community Reinvestment Act (CRA) small business loans to study the effects of access to capital on small business growth in the USA at the county level. Grounded in theoretical models of imperfect financial markets and entrepreneurship dynamics, we use a panel of 3050 counties over the 1996–2010 period and find that, in general, CRA loans have a statistically significant positive effect on small business growth for the full sample of 3050 counties. This effect holds for different estimation techniques and robustness checks. More importantly, the results hold when we correct for the endogeneity of the CRA loans. The results also hold when the counties are classified into urban, rural, and low and moderate income.

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Notes

  1. The low- and moderate-income category comprises counties in which the median family income of the county is <80% of the national median family income.

  2. See http://www.federalreserve.gov/communitydev/cra_about.htm for more details (Accessed on October 10, 2013).

  3. Justification for choosing county level of aggregation is simply due to practical limitations. Most of the data used in the analysis is only available at the county level. While small business loans from the Federal Financial Institutions Examination Council (FFIEC) can be aggregated at the census tract level, we are unable to get the small business data at this level from publicly available sources.

  4. According to the Bureau of the Census, most nonemployers are self-employed individuals operating unincorporated businesses (known as sole proprietorships), which may or may not be the owner’s principal source of income. The Bureau of the Census also reports that, out of 30 million of all business establishments in 2011, 22.5 million (75%) were nonemployers. Their relative contribution to economic activity in terms of revenue is very small. Some of these firms do become employer firms, eventually making a bigger contribution to local and national economies.

  5. One reviewer suggested that this growth may be due to the energy boom experienced by these regions in the particular time period.

  6. Most of the information in this paragraph on CRA loans was derived from Bostic and Canner (1998) study.

  7. All institutions regulated by the Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of Thrift Supervision that meet the asset size threshold are subject to CRA data collection and reporting requirements. The asset size threshold that triggers data collection and reporting for all agencies for 2013 is $1.186 billion as of December 31 of each of the prior two calendar years (http://www.ffiec.gov/cra/reporter13.htm).

  8. For this purpose, small businesses are defined as firms with annual revenues of $1 million or less (see Avery et al. 2000).

  9. See Craig et al. (2008) for a more detailed account on the justification for any government sponsored small business credit program based on the theoretical arguments presented by Stiglitz and Weiss (1981).

  10. While it may be more appropriate to use the employment numbers as our dependent variable, this is not possible because employment data for many counties are withheld to avoid disclosing data of individual companies.

  11. In the interest of space limits, we do not report these robustness check results in the paper except in the first case. These results are available from the authors upon request.

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Authors and Affiliations

  1. Economic Research Service/USDA, 1400 Independence Ave, SW Mail Stop 1800, Washington, DC, 20250-0002, USA

    Anil Rupasingha

  2. School of City and Regional Planning, Georgia Institute of Technology, 245 Fourth Street, NW, Atlanta, GA, 30332, USA

    Kyungsoon Wang

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  1. Anil Rupasingha
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Correspondence to Anil Rupasingha.

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The views expressed are those of the authors and should not be attributed to the Economic Research Service or USDA.

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Rupasingha, A., Wang, K. Access to capital and small business growth: evidence from CRA loans data. Ann Reg Sci 59, 15–41 (2017). https://doi.org/10.1007/s00168-017-0814-9

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