Investor Familiarity and Corporate Debt Financing Conditions
15 Pages Posted: 16 Mar 2017 Last revised: 26 Oct 2017
Date Written: October 23, 2017
This study contributes to our understanding of how retail bondholders value familiarity with the issuer. Using a sample of corporate bonds issued by German non-financials and especially marketed to individual investors, we document that – besides product market visibility – three previously unconsidered antecedents of investor familiarity, i.e. local visibility, media visibility and overall recognition of the bond-issuing company, are negatively associated with credit spreads. Given that company visibility does not necessarily result in a reduction of fundamental risk for the group of bondholders, the finding that higher familiarity relates to lower risk premia suggests heuristic decision behaviour among retail investors where a familiarity bias reduces the perceived risk of bond investments.
Keywords: Investor familiarity, retail investors, company visibility, cost of capital, cost of debt, corporate bonds
JEL Classification: D22, D83, G02
Suggested Citation: Suggested Citation