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Small Business Economics

, Volume 50, Issue 3, pp 445–461 | Cite as

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

  • Timothy BatesEmail author
  • William D. Bradford
  • William E. JacksonIII
Article

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 

JEL classification

G24 L2 L89 

Notes

Acknowledgements

Research reported in this study was generously supported by the E. M. Kauffman Foundation. Additional support was received from the SBA Office of Advocacy.

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  • Timothy Bates
    • 1
    Email author
  • William D. Bradford
    • 2
  • William E. JacksonIII
    • 3
  1. 1.Distinguished Professor of EconomicsWayne State UniversityDetroitUSA
  2. 2.Endowed Professor of Business and Economic DevelopmentUniversity of WashingtonSeattleUSA
  3. 3.The Smith Foundation Endowed Chair of Business IntegrityUniversity of AlabamaTuscaloosaUSA

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