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

See all articles by Mark Mietzner

Mark Mietzner

Zeppelin University

Juliane Proelss

Concordia University, Quebec; Trier University of Applied Sciences

Denis Schweizer

Concordia University

Date Written: August 27, 2016

Abstract

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

Mietzner, Mark and Proelss, Juliane and Schweizer, Denis, Hidden Champions or Black Sheep? The Role of Underpricing in the German Mini-Bond Market (August 27, 2016). Small Business Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2720032 or http://dx.doi.org/10.2139/ssrn.2720032

Mark Mietzner

Zeppelin University ( email )

Am Seemooser Horn 20
Friedrichshafen, Lake Constance 88045
Germany
+49 7541 6009-1232 (Phone)
+49 7541 6009-1299 (Fax)

HOME PAGE: http://www.zu.de

Juliane Proelss

Concordia University, Quebec ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

Trier University of Applied Sciences ( email )

Scheidershof
Trier, 54293
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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