Hidden Champions or Black Sheep? The Role of Underpricing in the German Mini-Bond Market
58 Pages Posted: 22 Jan 2016 Last revised: 28 Aug 2016
Date Written: August 27, 2016
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 rating inflation by issuing overly favorable ratings. This creates a favorable 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. Ratings Inflation. Small Medium Sized Enterprises (SMEs)
JEL Classification: G12, G30, G32
Suggested Citation: Suggested Citation