Does Inferior Financing Hold Back Women-Owned Businesses?

Much academic research shows that, on average, businesses owned by women perform worse than those owned by men. 

But that’s just an observation.  The really important question is why?

One common explanation is differences in financing.  Because female business owners can’t access as much outside capital as male business owners – the argument goes – their businesses have inferior capital structures, which drag down their performance.

A recent study by Alicia Robb of the Kauffman Foundation and Susan Coleman of the University of Hartford used data from the Kauffman Firm Survey to evaluate this explanation.
 

(The KFS tracks a sample of firms from the 2004 cohort of start-ups over time.  The foundation’s method of identifying the cohort of new businesses is complicated and is not necessarily representative of the overall population of businesses started in 2004, nor is it comparable to data from other sources like the Census Bureau. But the KFS is a useful sample to look at the performance of new companies.)

Robb and Coleman’s analysis showed that, after taking into account a variety of other factors, women-owned businesses were less likely than men-owned businesses to have an external equity investment. (There was no difference in the odds of having outside debt, a bank loan, or insider financing between male and female-owned businesses.) 

The two authors also found that women-owned firms were worse performers, on average.  They were less likely to have employees, high revenues, high assets, or high profits than male-owned firms. 

However, the study showed that gender differences in access to external equity didn’t account for the lesser performance of women-owned businesses.  Rather, gender influenced performance in some other way. 

In fact, Robb and Coleman’s analysis showed women-owned businesses were less likely than men-owned businesses to have high revenue or assets.  But businesses with more external debt (less external equity) were more likely to have high revenues and assets.  Because the women-owned businesses had less outside equity than male-owned businesses on average, the effect of gender on capital structure isn’t a likely explanation for the lesser performance of female-owned start-ups. 

If capital structure doesn’t account for the lesser performance of women-owned businesses, then what does?

I don’t know, but the authors propose a not-very-PC explanation.  They conclude, “Women may place less value on firm size and profits than men-owned firms. Alternatively, women may have a higher level of risk aversion for the perceived risks associated with firm size, growth, and a possible loss of control.” 

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