Home equity lending, credit constraints and small business in the US

Abstract

We use Texas's constitutional amendment in 1997 that expanded the scope of home equity loans as a source of exogenous variation to estimate the effects of relaxing credit constraints on small businesses. We find, using standard panel data methods and restricted‐use microdata from the US Census Bureau, that the Texas amendment increased the use of home equity finance by small businesses, increased new business and job creation and reduced firm exit and job loss. The effects are larger and significant for businesses with fewer than 10 employees.