Hidden Champions or Black Sheep? Evidence from German Mini-Bonds
47 Pages Posted: 2 Jul 2015
Date Written: June 30, 2015
This paper presents a first empirical examination of all available German mini-bond offerings between 2010 and 2015. We compare the default probability according to a mini-bond’s initial rating with that implied by credit risk models, and show that rating agencies can create ratings inflation by issuing overly favorable ratings. This creates a “window of opportunity” for lower-quality firms to compete for funding. In this environment, high-quality firms have an incentive to use mini-bond underpricing to signal their quality. Our data highlight that, according to information-based corporate finance theory, higher underpricing is correlated with higher-quality mini-bond issuers and lower early default rates.
Keywords: Credit Risk; Financing Gap, Mini-Bonds, Mittelstand, Rating Inflation, Small Medium Sized Enterprises (SMEs)
JEL Classification: G12, G30, G32
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