Linkages between minority business characteristics and minority banks’ locations

L I N K A G E S B E T W E E N M I N O R I T Y B U S I N E S S

C H A R A C T E R I S T I C S A N D M I N O R I T Y B A N K S '

L O C A T I O N S

John A. Cole and Lucy J. Reuben

This study presents evidence regarding differences in the financial characteristics of minority business enterprises (MBEs), contingent upon whether or not they are currently located in markets which contain minority banks. We employed Dun and Bradstreet financial data for the period 1975-83. We concluded that, on average, MBES not located in markets with minority banks were larger than the bank-related MBES, laid greater emphasis on fixed assets, and financed their businesses with more equity. The bank-related MBES apparently had greater access to debt financing and operated with greater liquidity.

A central issue in the question of business viability and growth is the availability and use of business capital. The availability of adequate capital significantly affects business formation, survival, and failure rates. Presently, the process whereby capital is accumulated and used in the minori ty business communi ty is not adequately understood. 1 There is a paucity of research that directly addresses concerns of the availability and employment of capital for minor i ty business enterprises (MBEs). One re- sult is that the literature has not adequately investigated the extent to which variability in financial condit ions among MBEs is related to the nature of the financial management deficiencies faced by MBEs. There is, therefore, little theoretical basis for providing scientific advice to different minori ty entrepreneurs. The objective of this article is to provide evidence as to whether there are systematic differences between two groups of MBEs. We examine whether MBEs currently located in markets with local minority banks exhibit financial characteristics that are different from the finan-

74 The Review of Black Political Economy/Fall 1986

cial characteristics of MBEs located in markets that do not currently include minority banks.

This study does not attempt to compare MBEs with non-MaEs in any way; it is concerned solely with the issue of how the financial attributes of MBEs may be related to the presence of minority banks. 2 In its comparison of MBEs with other MBEs, this study is consistent with the recent vein of inquiry (e.g., Gardner, 1983) which considers the unique characteristics among MBEs. These studies suggest that, in addition to the works that compare MBEs with non-MaEs, critical examinations of the MBEs, as a separate group, can be profitable.

There are two dominant strands of the financial literature pertaining to minority economic development: both focus on minority banks. One set of studies focuses on the comparative differences of the financial statements of minority banks vis-fi-vis those of nonminority banks. These differences are generally used as a basis for inferences regarding possible development roles for minority banks. Representative of this type of work are Brimmer (1971), Black (1979), and Kwast and Black (1983). For example, Brimmer (1971) argued that black banks, often small and com- paratively unprofitable, should not be seen as vehicles that might meaningfully affect economic development. A second segment of the literature, also centered on minority banks, argues that, as a part of an evolutionary development process, these banks serve as an increasingly efficient means of information and technology transfer. Representative of this line of work are Irons (1971), Farley (1972), Boorman (1974), and Bates and Bradford (1980). Little explicit investigation has been conducted on the matter of capital availability to MaEs, and any variability reflective of how they employ their capital. Exceptions in this regard are the works of Drebin, Doctors, Irons and Hunter (1975), Summers and Tucker (1976), and Nicholson, Esbitt, and Currie (1981).

In this essay, we investigate whether there are significant differences in the performance of MBEs contingent on whether or not they are currently located in markets with minority banks. Specifically, we investigate the financial characteristics of the MBEs, identify their relative strengths and weaknesses, and thereby identify certain areas where minority banks may be of greatest potential relevance to MBEs. 3 In the following section, we develop our hypothesis relating the potential impact of minority banks on the operations of non-bank MBEs. In the third section, the data and methodology are described. The fourth section contains the analysis and re- suits, and the last section presents the conclusions that arise from the study.

Cole and Reuben 75

DEVELOPMENT OF HYPOTHESIS

The importance of MBEs lies in the fact that their successful operation may provide a significant economic development thrust in the cities in which they operate. These MBEs are most likely to bring services and products to neighborhoods that may otherwise not be adequately served. Those factors that contribute to the profitability and growth of MBEs should be identified for purposes of improving internal operations as well as for relevant public policy. One such element is the availability of business capital. It is possible that current access to local minority banks minimally may signal a wider range of options for debt capital to local MBEs.

In general, capital funds are needed for both working capital and for fixed or long-term capital (arising from some capital budgeting process). If either type of capital is in relatively short supply, or is available at relatively prohibitive costs, then, ceteris paribus, business output and activity may be constrained. Under purely competitive conditions, there should be no systematic differences in the financial characteristics of MBEs, whether or not they conducted their business in markets where currently there were local minority banks. In the absence of purely competitive conditions, however, minority banks may indeed serve a significant role in the determination of conditions affecting debt capital availability to MBEs. An important question then arises as to whether MBEs exhibit any systematically different characteristics depending upon their access to local minority banks. 4

For example, as a general proposition, MBEs are relatively small and may be expected to exhibit significant degrees of inefficiency. These ineffi- ciencies may arise in the absence of scale economies, and that absence may partly be traced to a lack of capital for purposes of business modifica- tion, expansion, diversity, and growth.

Where the problem of lack of capital arises for noneconomic reasons, it is possible that some astute entrepreneurs may pursue the resulting potentially lucrative opportunities to offer banking services that facilitate and stimulate a community of MBEs. 5 If, due to some departure from purely competitive conditions, only minority banks are willing to pursue these opportunities, then the existence of minority banks may make a difference in the financial characteristics of local MBEs. Minority banks may make a difference to local MaEs if such banks can directly provide services that these MBEs currently demand, or if the minority banks induce other institutions to provide such services to MBEs on a competitive basis. U1-


timately, any impact should be reflected through the financial statements of the MBEs Thus, from these considerations, the following null hypothesis arises:

Ht0: The financial characteristics of MBEs are unaffected by the presence of local minority banks.

It is this general hypothesis that is being explored in this article.

DATA AND METHODOLOGY

Two sets of data were merged together in order to explore whether significant differences in financial characteristics arose among the classes of MBEs contingent on a current presence of local minority banks. One data base, the Financial Research Database, was obtained from the Mi- nority Business Development Agency of the U.S. Department of Com- merce. The other consists of call report (financial statement) data on minority banks and was obtained from the Board of Governors of the Federal Reserve System. 6

Minority Business Data

The Financial Research Database (the MBDA database) is derived from Dun & Bradstreet's 1975-83 financial data. 7 The D&B data are obtained either from financial records or other statements of the business owners or their representatives. Such data are intended primarily as a basis for as- sessing the creditworthiness of these businesses. 8 In many cases, all current financial data may not be available for every business. However, some descriptive items of information are available for 3,819 firms entered on the database during the study period, 1975-83. 9

The firms in the MBDA database were generally larger, older, and dis- proportionately representative of the manufacturing and construction sectors relative to the retail sector of the minority business community. As such, the results obtained from these firms may not be generally applica- ble to the universe of minority businesses. Further, since the principal reason firms are entered into Dun & Bradstreet's database was to satisfy credit inquiries about themselves, they are a self-selected set of MBEs. Despite this caution about the generalization of results, these minority businesses constitute an inherently interesting set. For example, the analysis may provide results that are appropriate to the set of minority busi-

Cole and Reuben 77

nesses that have formally sought to establish their financial viability as evidenced by market-based inquiries for credit information. These may then represent the set of growth-oriented MBEs.

Minority Bank Data

In this study, the minority bank variable of interest is the set of cities wherein the minority banks were currently headquartered. This data was obtained from the call reports. Generally, any branching by minority banks is accomplished in their headquarters' location. Table 1 includes year-by-year information on the numbers of banks, cities in which minority banks were headquartered, and the time series of numbers of minority bank formations and failures in the period 1975-83.

From Table 1 it is clear that the number of cities within which minority banks were headquartered was relatively constant in the study period, ranging from a low of 59 in 1975 to a peak of 63 between 1978 and 1980. The number of banks, however, ranged from a low of 82 in 1975 to a total of 100 in 1983. The recession years of 1980-82 were the only periods of net reductions in the number of minority banks. Aspects of the dynamism in the minority banking sector are represented in columns 3 and 4 by the annual numbers of new minority banks and those which either lost their minority status or failed. Also, the number of minority banks exceeded the number of cities in which they were headquartered, indicating a degree of bunching among minority banks' headquarters. In the period

TABLE 1 Summary Minority Bank Headquarters Data

YEAR

1975 1976 1977 1978 1979 1980 1981 1982 1983

TOTAL #OF : MINORITY BANK~ CITIES wlth : #NEW #LOST YEAREND*

MINORITY BANKS : TOTAL 5 9 : 1 3 0 8 2 6 1 : 8 3 8 7 6 2 : 4 3 8 8 63 : IO 2 96 63 1 6 4 9 8 63 I 4 6 96 61 I 2 6 92 62 : 5 4 9 3 6~ : 9 2 10o

mTh@ y e a r e n d d a t e r e s t o t h e y e a r w h e n t h e b a n k s a s s u m e d minority status. These may not be de novo banks in every team.


1975-83, these banks were bunched primarily in Chicago, Los Angeles, Miami, Washington, D.C., and New York.

In this study, the objective is to investigate whether MBEs exhibit differences in financial performance characteristics contingent on the current presence or absence of local minority banks. Therefore, using a common city identifier, the MBDA database and the data on the minority banks were merged. Thus, we determined when MBEs and minority banks were headquartered in the same cities. A dummy variable assumed a value S = 1 whenever this match occurred. Otherwise, the variable value was S = 0. In other words, in our merged database, in each year of the study period, only where S = 1 were MBEs defined to have current access to local minority banks.

In each year of the study period, 1975-83, the MBEs were chosen to meet the following selection criteria:

�9 The level of net sales did not exceed $50 million. �9 The number of employees did not exceed 200. �9 Current assets did not exceed total assets. �9 Net worth was positive. �9 Neither inventories nor fixed assets was negative. �9 Net fixed assets were positive. ~~

Given our scheme of classifying cities, a full range of the ethnic minorities was represented among the minority banks) ~ The distribution of bank- related MBEs in our final database, and the ethnicity of the minority banks to which they had current access, were distributed as illustrated in Table 2.12

Recall that the number of banks exceeded the number of cities wherein they were headquartered. This meant that some clustering was occurring among the minority banks through time. Our final data set reflected that clustering. A distribution of MBEs in selected major cities where this clustering occurred is given in Table 3.

Table 3 shows the number and distribution of MBEs across a selected set of major cities wherein minority banks were located. ~3 For example, the table shows that in 1977, 15 of the MBEs in the sample were located in New York. The last row shows that, for this study, the overall total number of cities wherein sample MBEs had access to local minority banks ranged from a low of 8 in 1975 to a high of 40 in 1979. Among cities with minority banks, Miami consistently contained the largest number of sample MBEs. Second and third in order were Chicago and Los Angeles. ~4

Cole and R e u b e n 79

T A B L E 2

D i s t r i b u t i o n of MBES by B a n k M i n o r i t y S t a t u s

mimrity 19"/5 1976 t977 1976 197~ I%0 t%t 1987. 1983 STATUSI2

Black 4 19 19 ~ 45 ~ 4 28 20 kk~m 5 4 3 6 ~ - 6 I Hispanic I~er. - - 11 23 1B I 8 12 ~ x i c a n 3 12 18 ~ 30 30 1 ~1 13 Puerto Rican 4 ~6 47 74 94 ~ 7 ~ 1 ~ i a n r - - - 3 7 7 (~intw.e 18 14 31 23 13 5 Eskilm - 1 2 3 ~ - 2 l Multiracial - 2 - - - 12 1 2 51

Thus, the sample reflected a wide geographical distribution of cities wherein MBEs had current access to local minority banks. There is a similarly wide geographic distribution among the non-bank-related MBEs. For the MSEs which met our selection criteria, the following financial variables were obtained (where available):

Because we pooled the data for this study over the period 1975-83, we used the Consumer Price Index (for urban households) to adjust for inflation on all of the relevant financial variables. All of our analysis was done on this pooled inflation-adjusted set of data. A description of our database is presented in Table 4.

For those firms that met our selection criteria, Table 4 presents the

T A B L E 3

D i s t r i b u t i o n of MnEs in S e l e c t e d M a j o r C i t i e s

Jg"~ 1576 1977 1978 1979 1980 1981 1982 t~3

Chicago 1 4 7 10 20 IG ~ 7 10 Brookly~ 7 6 11 9 13 1 9 5 N~ York 4 15 10 19 20 - 12 4 l l i a i 4 21 40 63 79 71 7 42 43 Mnhington - I 2 3 2 - 2 1 Los ffngelmu 1 2 3 4 9 12 1 2 9 Hialeah 5 7 12 12 10 - - -

Overal I Total 8 21 ~ 30 40 33 9 27 30


�9 Net profits after taxes. �9 Operat ing profits. �9 Sales levels. �9 Dividend payments. �9 Total assets. �9 Loans. �9 Notes payable. �9 Equity. �9 Accounts receivable. �9 Accounts payable. �9 Net fixed assets. �9 Cash balance. �9 Inventories. �9 Working capital. �9 Cur ren t liabilities. �9 Cur ren t assets.

numbers of observations and means o f the variables for all MBEs included in this investigation. Columns 2 and 3 are, respectively, the n u m b e r o f observations and means for the pooled (TOTAL) set o f MBEs. Co lumns 4 and 5 present the same statistics for the unincorpora ted MBEs only, and co lumns 6 and 7 are the same statistics for corporat ions only.

As the numbers of observations show, most o f the observations were consistently generated by corporations. Similarly, on average, the corporations were larger than were the un incorpora ted MBEs. All subsequent analysis o f the a b o v e o b s e r v a t i o n s will i n c o r p o r a t e a s e p a r a t i o n o f observations cont ingent on whether they were obta ined f rom MBEs which had current access to local minor i ty banks.

In this study, the objective was to investigate whether there are significant differences in the financial characteristics of MBEs that had cur ren t access to local minor i ty banks, when compared with those that did not have such access. For this examinat ion, we stratified the financial data on all MBEs in our sample condi t ioned on whether or not the MBEs yielding the data had current access to local minor i ty banks. In the process, we created a d u m m y classification variable S, already referred to above. This stratification yielded two classes of MBEs in relation to their access to local minor i ty banks.

For the observations we had on each financial variable, we pe r fo rmed tests for statistical differences in the means of the two classes of MBEs. We used standard t tests for investigating whether the financial variables dif- fered significantly across these two classes o f MBEs. The tests were conducted under two assumptions related to the variances of the observations on the two MBE classes. We obtained results based on the assumption that the variances were equal, and then assuming that they were unequal across the two classes. In general, the difference in assumption regarding the equality of variances did not produce very different results regarding mean differences. Thus, we report results for only those financial varia-

Cole and Reuben

TABLE 4 Means of Variables by Type of Business Organization*

TOTAL LJNIIqOORP OORPOR'

I~S MEP~ 09S ~ l ~ 08S MELON

81

~et profits after~-taxes 16~ ~.198 305 3193~ 1387 44455

operating profits

sales level

dividend payments

total assets

loans

notes payable

accounts receivable

account s Payable

net fixed assets

cash balance

z~ventories

~mrkznw caoital

current l iabi l i t ies

current assets

1114 236972 189 113~7 925 L~35

2130 9~5l~3 431 379037 1699 111~78

666 7747 161 Lx~6 505 9~65

2130 394708 431 21 ~J94 1699 440880

944 25171 197 8640 747 ~ 3 1

1135 412~ ~ 1~72 915 1~-----------------~8

1988 115404 3~ 47863 1699 1838%7

L~X)7 80617 377 Lx)39(! 1606 131~9

2130 83174 431 62145 1630 92~o5

2~09 38449 4~.(1 L:~O001 1699 88509

2130 109044 4~31 50064 1699 124006

2130 116708 431 73150 1699 1~T158

2116 165670 ~4 54548 169~ 193516

2130 ~1~J89 431 I~IZ IE~ ~7E

OBS indicate~ numbers of observationm.


bles where statistical significance persisted without regard to the variance assumption.

The statistically different variables were compiled into tables that facili- tated comparisons of the financial characteristics of the two classes of MBEs. We performed three separate sets of tests across the two classes of MBEs. Firstly, we tested for differences on the pooled sample of all MBEs. Then we tested separately the subsets of corporations and non-corporations.

ANALYSIS AND INTERPRETATION OF RESULTS

Our null hypothesis states that the financial characteristics of MBEs are unaffected by their current access to local minority banks. If our null hypothesis is true, then there would be no significant differences on any variable means across classes of MBEs. Differences in financial characteristics were investigated by testing for significant differences in the means of inflation-adjusted variables.

Comparisons in the Entire Sample

The results in Table 5 were obtained based on a comparison of all observations on each variable for all bank-related MBEs with parallel observations for all non-bank-related MBEs. We discovered statistically significant differences across financial variables describing both current and long-term financial items as well as significant differences across profit levels? 5 We could therefore reject our null hypothesis for the total sample of MBEs. One striking observation, however, is that MBEs in our sample which did not have access to local minority banks were generally larger (as measured by assets) than those with such access. 16 Total assets, net fixed assets, and current assets were, on average, significantly larger in the case of MBEs without access to local minority banks. Surprisingly, we found no statistical debt level differences across the classes of MBEs. Any financing differences in Table 5 are reflected in the levels of accounts payable and net worth. However, these financing levels may merely reflect the differences in asset sizes. 17

Summarizing Table 5, when our total sample of minority business firms was segregated only on the basis of whether or not they had current access to local minority banks, a wide range of financial variables exhibited significant differences. We therefore rejected our null hypothesis that current access to local minority banks did not affect the financial charac-

Cole and Reuben 83

TABLE 5 Analysis of Differences in Means of All MBES

CITY VARIABLE NAME #OBS. MEAN T-STAT "" 5IGNIF"* TYPE S=O m ACCTS. PAYABLE 4 0 4 1 1 7 3 6 7 1 . 7 . 0 9 S=I 904 94927 1.9 .06

S=O TOTAL ASSETS 425 629959 3.7 .00 S=I 955 432871 4.5 .00

S=O NET FXD ASST 425 140141 4.3 .00 S=1 955 77054 5.4 .00

S=O CURRENT ASSETS 425 430988 2.6 .00 S=1 955 32?344 3.1 .00

S=O NET WORTH 425 300384 4.2 .00 S=I 955 174220 5.8 .00

S=O CASH 422 72437 2.4 .01 S=I 944 38256 3.2 .00

S=O ACCTS. REC'BLE 399 157520 1.8 .07 S=1 887 130640 1.9 .05

S=O WORKING CAPITAL 425 199215 3.4 .00 S=1 955 124272 4.5 .00

S=O AFTER-TAX PROFITS 329 70522 1.6 .i0 S=1 774 46798 2.3 .02

S=O EMPLOYEES 1056 76 3.1 .00 S=1 1074 70 3.1 .00

"When S=O, the observed MBEe did not have access to local minority banks. When S=I, the observed MBEs did have such access.

~m T-statistics and eignificanc@ levml~ represent (by rowe) rempectlvely, testa s the equality os means when the analyzed subsamplsa are first hypothesized to have unequal and then equal varlancea. This convQ~i@~ le followed in all our tables. Because os the nature of the data, only those vmrlablse exhibiting statistically significant differences without regard to the equality of verlancee in the aubssmplee are retained for further dlecuaeion and analysis.

teristics of MBEs. The most pervasive statistical differences seemed related to differences in sizes of firms as measured by assets. The MBEs with no access to local minority banks were systematically larger, with total assets averaging $629,959. The possibility that assets might be financed differently for the two samples of MaEs was reflected in the net worth and accounts payable categories of Table 5. For example, on average, net


worth financed 47.7% of total assets of MBEs without current access to local minority banks, but only 40.2% for MBEs with such access. The MBEs with current access to local minority banks tended to use higher propor- tions of debt in their financing. In other words, assuming that, on average, bank financing is directly related to proportionate debt financing, it may well be that, given current access to local minority banks, MBEs tend to rely more heavily on bank financing, j8 We can better explore these issues by disaggregating the sample and repeating the analysis, as indicated in the following discussion.

Comparisons Among Unincorporated MBEs

When proprietorships, partnerships, and corporations were pooled, we identified a wide range of significant differences in financial variables across the two classes of MBEs. TO gain a better insight into these differences, we segregated the sample of MBEs into those that were incorporated and others that were not incorporated. In this section, we consider the unincorporated MBEs. Table 6 describes the significant differences across the two classes of unincorporated MBEs.

T A B L E 6 Unincorporated MBEg

CITY VARIABLE NAME OBS. MEAN T-STAT SIGNIF S:O EMPLOYEES 234 62 3.1 0 5=1 197 50 3.1 0

5=0 ACCTS PAYABLE 92 23644 -3.0 .00 S=I 160 42230 -2.4 .02

S=O CURRENT LIABS. 102 49141 -2.6 .01 S=I 180 75646 -2.2 .02

5=0 NOTES PAYABLE 55 7794 -2.4 .02 S=I 105 17458 -1.9 .06

5=0 INVENTORIES 104 52537 -2.2 .02 5=1 182 76011 -1.9 .06

S=O ACCTS REC'ABLE 89 39751 -2.7 .00 S=1 161 67675 -2.3 .02

S=O CURRENT ASSETS 104 133682 -2.3 .02 S=I 182 178031 -2.1 .03

5=0 NET FXD ASST 234 71699 2.1 .03 S=1 197 50796 2.1 .03

Cole and Reuben 85

AS can be seen in Table 6, significant differences in financial variables among the unincorporated MBEs in our sample occurred in areas of current assets and current liabilities. These differences reflected significant differences in the current asset mix across the unincorporated MBEs. For example, MBEs with access to local minority banks maintained higher average levels of accounts receivable and inventories within their current assets. In the case of MBEs with access to local minority banks, there were significantly fewer net fixed assets and more current assets.

Regarding financing of their assets, MBEs with access to local minority banks employed significantly higher levels of accounts payable and notes payable. The difference in the amounts of notes payable is particularly indicative of greater use of debt financing by MBEs with access to local minority banks. ~9 Again, in the case of unincorporated MBEs, we rejected our null hypothesis that current access to local minority banks did not affect the financial characteristics of MBEs.

While Table 5 showed that, using the overall sample, MBEs without access to local minority banks appeared to be generally larger than MBEs with such access (as measured by asset sizes), no such overall size difference arose in the context of unincorporated MBEs only. The question then arises as to how the incorporated MBEs compared, contingent on their access to local minority banks.

Comparisons Among Incorporated MBEs

We can now investigate the possibility that incorporated MBEs exhibited financial differences given our classification scheme. Our null hypothesis is that there would be no differences on average, across our classes of MBEs, for any financial variables. Using our methodology, the significantly different variables are as shown in Table 7.

Statistically significant differences across the two classes of incorporated MBEs were recorded for the full range of financial variables. Wher- ever those differences arose, they confirmed that the larger incorporated MBEs were those without access to local minority banks. In the case of after-tax profit levels, although they are significantly different across the classes (apparently reflecting the size differences), using ratios based on the averages of after-tax profits and net worth in Table 7, the respective rates of return on equity (net worth) were quite comparable, with a slight advantage to those with access to local minority banks. The values of these ratios were 23.2% and 27.1%, respectively, for incorporated MBEs without and those with access to local minority banks. In any case, in the


TABLE 7 Incorporated MBES

C I T Y V A R I A B L E NAME OBS. MEAN T - S T A T S I G N Z F

S=O ACCTS PAYABLE 312 145003 2.4 0.02 S=I 744 106259 2.7 0.01

S=O CURRENT LIABS 321 291249 1.7 0.09 S=1 770 234179 1.8 0.07

S=O TOTAL ASSETS 321 756949 4.2 0 S=1 7 7 3 4 6 8 7 4 0 5 . 3 0

5=0 NET FXD ASST 321 314441 4.4 0 S=1 773 157701 5.7 0

S=O CURRENT ASSETS 321 527311 3.3 0 S=l 773 362500 4 0

5=0 NET WORTH 321 346787 4.5 0 S=I 773 174126 6.4 0

S=O INVENTORIES 321 207924 1.9 0.06 S=1 773 160215 2 0,05

S=O CASH 318 85335 2.3 0.02 S=I 763 41848 3.3 0

S=O ACCTS REC'BLE 310 191330 2.5 0.01 S=I 726 144603 2.8 0

S=O WORKING CAPITAL 321 236063 3.8 0 S=I 773 129230 5.1 0

S=O A/TAX PROFITS 259 80583 1.8 0.07 S=I 644 47133 2.7 0.01

S=O EMPLOYEES 822 80 2.6 0.01 S=1 877 74 2.6 0.01

case of the incorporated MBEs, we could reject the null hypothesis that current access to local minority banks did not affect the financial characteristics of MBEs.

The results in Table 7 provide some other insights that are worthy of further study. Consider the averages of the financing variables: accounts payable and net worth. In the case of incorporated MBEs without access to local minority banks, these two categories together financed 65% of total assets. For MBEs with access to local minority banks, the comparable percentage was 59.8%. Given these percentages, one possibility is that debt financing accounted for the proportionate differences in asset financing. 2~ This difference raises the issue of whether MBEs with access to

Cole and Reuben 87

local minority banks also finance their smaller average levels of assets very differently from other incorporated MBEs.

Consider then the average levels of current assets in Table 7. Again, the levels of current assets are significantly different across the classes of MBEs. The composition of these current assets warrants attention. Dif- ferences in the compositions are reflected in the average levels of inventories, accounts receivable, and cash in Table 7.

In the case of incorporated MREs without access to local minority banks, average inventories represented 39.4% of their average level of current assets. Current assets represented 69.7% of total assets on average. In the case of incorporated MaEs with access to local minority banks, current assets represented 77.3% of their total assets on average. Relying on the respective averages in Table 7, among incorporated MBEs with access to local minority banks, inventories represented 44.2% of current assets, accounts receivable represented 39.9% and cash 11.5% on average. Such differences in financial variables seem to highlight an important difference in the balance sheet structures of incorporated MBEs: those with access to minority banks tended to emphasize current assets instead of fixed assets. Additionally, these MBE's current assets were more heavily weighted to the illiquid items of inventories and accounts receivable rather than cash. Where incorporated MBEs had access to local minority banks, they exhibited a tendency to use higher levels of debt financing than they otherwise would.

There are two other points that deserve comment. First, the differences in the two groups of MBEs with respect to average total assets and number of employees are also significant. MBEs without access to local minority banks invested about $9,462 in assets per employee. The comparable figure for those with such access is $6,334. Thus, incorporated MBEs with- Out access to local minority banks may be more efficient than those with such access. 21 Assuming all other things are equal, MBEs might be obtaining a higher level of productivity from their employees when they do not have access to local minority banks.

The second point is that in all instances, the higher number of observations on MBEs meeting our selection criteria arose where there were currently local minority banks; i.e., according to our sample, MBEs were more likely to be located in cities with minority banks. Alternatively, cities with minority banks had, on average, a higher number of MBEs than cities that did not have minority banks. One plausible interpretation of these observations is that in cities where MBEs had access to a local minority bank, a larger number of minority businesses existed and they were less restrained


in making credit demands. In this way, they generated more observations in the Dun & Bradstreet database and hence the derived MBDA database. 22 If this is so, then this is evidence that the existence of local minority banks is associated with a higher degree of minority entrepreneurship.

Nevertheless, asset size and composition differences, as well as effi- ciency disparities, are reasons for concern. They give rise to a need for investigation of the rates of formation and failure across these classes of MBEs. All of these comments are indicative of a possible problem with capital budgeting procedures among MBEs with access to local minority banks.

CONCLUSION

This article has presented evidence regarding the performance of MBEs contingent on whether or not they have access to local minority banks. The null hypothesis was that current access to local minority banks did not affect the financial characteristics Of MBEs. The data for the study were collected for MBDA o f the Department of Commerce by Dun & Brad- street.

For those MBEs that met the selection criteria in this study, we classified them as to whether they had current access to local minority banks. The study period extended over the period 1975-83. In those instances where local minority banks operated, the MBEs were deemed to have access to local minority banks. After that classification, the financial characteristics of the MBEs were compared. The comparisons were done at three levels. First, both corporations and noncorporations were pooled together and compared contingent on their access to local minority banks. Next, only noncorporations were compared, and, finally, only corporations were compared. At every level of statistical analysis, we rejected our null hypothesis. Our evidence was consistent with the alternative that current access to local minority banks affected the financial characteristics of MBEs.

The main findings related to our sample were as follows:

�9 On average, MBEs which had no access to local minority banks in the study period were larger (as measured by asset holdings) than MBEs with such access. This observation was largely a phenomenon of the incorporated MBEs. The unincorporated MBEs exhibited no significant size differences.

�9 Where they have access to local minority banks, MBEs apparently

Cole and Reuben 89

m a k e greater use o f debt f inanc ing t h a n they o therwise would . Th i s

f inding held t rue for bo th c o r p o r a t i o n s a n d n o n c o r p o r a t i o n s . �9 W h e r e they have access to local m i n o r i t y banks , MBEs invest m o r e

heavily in c u r r e n t assets, o the r th ings be ing cons tan t . I n c o r p o r a t e d MBEs en joy ing this access s eemed to e c o n o m i z e on their cash ho ld-

ings, bu t to increase their i nves tmen t s in inven to r ies a n d a c c o u n t s

receivable. �9 Mos t o f the obse rva t ions on the MBEs in ou r s ample c a m e f r o m cities

with local m i n o r i t y banks.

These results suggest tha t the role o f m i n o r i t y b a n k s in the g rowth a n d

survival o f m i n o r i t y businesses m a y be qui te c o m p l e x a n d in need o f

greater explora t ion .

NOTES

We wish to thank Dr. Peggy Carr of Howard University's Computation Center, and Bryan Davis for computing assistance. We received useful comments from Dr. Alfred Edwards, Dr. Margaret Simms, Dr. Gavin Chen, and Mr. James Hansley. Ron Meeks provided great support in obtaining and retrieving data. The authors assume respon- sibility for any errors. This effort represents partial results of a research contract from the U.S. Department of Commerce.

1. Evidence of this lack of understanding is revealed dramatically in the case of black businesses and their problems. For example, the Bureau of the Census has reported that as of 1982, the number of black businesses increased by 47% between 1977 and 1982 to a total of 339,239. Yet half of these businesses had receipts of less than $5,000, and only 1,129 companies had receipts of $1 million or more. See Bureau of the Census Release of Oct. 8, 1985, United States Department of Commerce News.

2. We have no information to suggest that including nOn-MBES would alter our results, given the specified variables of interest. Also, we have no information to expect biases due to regional growth or industry factors, since as we shall show, both groups of MBES exhibit the great diversity in both factors. In this study, our focus is not primarily to investigate what are appropriate standards for the set financial behavior of MBES. Rather, we intend to discover any systematic variability in the way MBES behave, and to make inferences as to the environmental influences on those variances. In particular, we are investigating the presence of a local minority bank as an environmental factor.

3. This is an important issue, since the proposition that the general health of the community of minority banks largely reflects ongoing (but potentially correctible) problems of surrounding MBES cannot be dismissed. If specific weaknesses of potential commercial clients (MBES) can be identified, then minority banks may improve their performance by making more and higher quality commercial loans.

4. Minority banks may serve a significant role if nonminority banks intentionally discriminate against MBES in the provision of capital or other services, or if nonminority banks effectively discriminate against MBES by applying unnecessarily strin- gent criteria against MBES. Nonminority bank decision-makers may, due to lack of information about or experience with MBES, apply inappropriate risk premia in eval- uating MBES.


5. It is expected that these are entrepreneurs who do not discriminate against MBES and who do not systematically assign MBES higher risk premia than warranted by the economics of the enterprise.

6. Call reports contain income (P&L) statement and balance sheet data in a form especially mandated by federal regulatory agencies for commercial banks.

7. See DETAS, "Using the Minority Business Development Agency Financial Re- search Database," Richard B. Wadsworth, Development Through Applied Science, San Antonio, Texas, Minority Business Development Agency, U.S. Department of Commerce, May 1982, p. 23.

8. The MBDA data base is specifically derived from Dun's Financial Profiles, a set of 800,000 firms. These firms were matched with "many local directories from a variety of sources" in order to compile a comprehensive list of minority enterprises within the pool of businesses in Dun's Financial Profiles.

9. Missing data is a serious problem on the MBDA database. Indeed, in the construction of the MBDA database, a large proportion of sales data was estimated through industry regression models. Thus, the most complete and reliable count of the number of firms on the MBDA database is obtainable from header information (see DETAS).

10. Many of these criteria were necessary to eliminate observations which made little economic sense. Apparently, the data collection process generating the MBDA database is vulnerable to frequent coding errors.

11. There was no usable or otherwise comparable identifier for individual minority groups among the MBES On the MBDA database.

12. Because several minority banks of varying ethnicity may currently be in a single city, it is quite possible that the pairings in some cases understates the range of minority banks to which the MBES have access.

13. Hialeah is a Florida town within which were headquartered several minority, primarily Hispanic-owned, banks during the study period.

14. The minority banks in Miami have been Cuban and Puerto Rican. Recently, one "large" multiracial minority bank has been noted in Miami. In Chicago the minority banks have been black, and in Los Angeles the minority banks have always been primarily a mix of Chinese, Mexican, and black.

15. In our methodology, the only variables that qualified for inclusion in any of our tables of mean differences were those significantly different at 10% or less, regardless of whether or not there exists sample variance equality.

16. Because both corporations and unincorporated businesses are being compared, there is a limit as to the amount of information that can be meaningfully extracted from these differences. Attempts at extracting more information are made when the subsamples are considered independently.

17. Within the sample of MBES in this study, there was no statistical difference in the mean levels of recorded net sales among these firms. Thus, if size differences are better captured by measures of net sales, the significance of the differences among the sample of firms in this study disappears. Note, however, that net sales are a joint function of asset size and asset turnover ratios. Thus, unless there is a control for differences in asset turnover ratios, rationalizing net sales as a size measure may be difficult.

18. First, the basis for an assumption that bank financing is inversely related to net worth is that equity, by definition is inversely related to debt, and most non-supplier debt financing of small businesses comes from bank financing. Second, this does not

argue that minority banks are themselves incrementally supplying the minority businesses with financing. This study was not designed to address that matter. We merely argue that for MBES as a whole--given our sample--it is plausible that if a minority bank is present, M BES may be availing themselves of more bank financing, other things equal.

Cole and Reuben 91

19. Different industries may exhibit unique financial structures. If systematic differences in industry participation existed, contingent on whether or not MSES have access to local minority banks, that could explain some of the differences in financial characteristics. However, there is no indication of such systematic differences in industry participation. Both samples represent a broad range of industries and localities.

20. Some support for this proposition lies in the fact that although total assets, net worth and accounts payable are significantly larger in the case of the MBES without access to local minority banks, the notes payable category does not show a statistically significant difference in favor of MBES without access to local minority banks. Thus, firms of different asset sizes seemed to have comparable levels of notes payable. Pro- portionately, the notes payable must be a larger proportion of the smaller firms, in this case MBES with access to local minority banks.

21. The basis for this supposition is that we have no direct information that the volume of profit (or other output) per volume of assets is significantly different between the two groups or that the cost per employee is any different, although after-tax profits per employee is greater for MBES without access to local minority banks, on average. (Recall that both samples cover a similar range of regions and industries.) The firm, or group of firms, that utilizes the lowest number of employees to manage a given amount of assets for a given amount of output can, therefore, be judged the more efficient firm(s). Indeed, this may be more evidence of the relative scale advantages enjoyed by incorporated MBES without access to local minority banks.

22. Relative size differences alone may not best capture the relative risk differences among these incorporated MBES. Using the averages in Table 7, the ratio of net worth to total assets is 45.8% in the case where these MBES had no access to local minority banks, and 37.1% in the case where the MBES enjoyed such access. These ratios may be due to the possibility that MBES without access to local minority banks are more generally expected to collateralize their credit demands as they arise. In fact, Drebins, Doctors, Irons, and Hunter have noted that local minority banks tend to participate more extensively in the SBA loan programs in behalf of their client MBES.

REFERENCES

Bates, Timothy M. "Lending Activities of Black-Owned Commercial Banks," The Review of Black Political Economy, Winter 1976.

Bennett, Robert A., "How the Banks are Squeezing Small Businesses," New York Times, Sunday April 25, 1982.

Black, Harold, "Financial Institutions and Urban Revitalization," The Review of Black Political Economy, Fall 1979.

Boorman, John T., New Minority-Owned Commercial Banks: A Comprehensive Anal- ysis. Federal Deposit Insurance Corporation, Washington, D.C. (1973).

Bradford, William D., "Financing Minority Businesses: The Impact and Interaction of Federal Government Programs," Journal of Minority Business Finance, August 1979.

Brimmer, Andrew E "The Black Banks: An Assessment of Performance and Pros- pects," Journal of Finance, May 197t.

Cole, John A., Alfred L. Edwards, Earl G. Hamilton, and Lucy J. Reuben "Black Banks: A Survey and Analysis of the Literature," The Review of Black Political Economy, Fall 1985.

OEIAS, Using the Minority Business Development Agency Financial Research Database, Richard B. Wadsworth, Development Through Applied Science (DETAS),


San Antonio, Texas, Minority Business Develoment Agency, U.S. Department of Commerce, May 1982.

Doctors, Samuel I., Allan D. Drebin, Edward D. Irons, and William C. Hunter, "A Pilot Study of the Impact of Minority Banks on Their Communities," The Review of Black Political Economy 5, no. 4 (Summer 1975).

Farley, Rawle, "Black Banking: A Comment on the Andrew Brimmer Bias," The Review of Black Political Economy, Spring 1972.

Gardner, Mona, "Minority-Owned Banks: A Managerial and Performance Analysis," Journal of Bank Research, Spring 1983.

Irons, Edward D. "Black Banking: Problems and Prospects," Journal of Finance 26 (May 1971).

Nicholson, Norman, Milton Esbitt, and Kent Currie. "Performance of Minority Banks in a Recession: The 1973-75 Experience." Baylor Business Studies 12, no. 3 (Au- gust/September/October 1981).

Documents

Linkages between minority business characteristics and minority banks’ locations