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Hidden champions or black sheep? The role of underpricing in the German mini-bond market

Author

Listed:
  • Mark Mietzner

    () (Zeppelin University
    TU Darmstadt)

  • Juliane Proelss

    () (Concordia University)

  • Denis Schweizer

    () (Concordia University)

Abstract

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 issuer`s and lower early default rates.

Suggested Citation

  • Mark Mietzner & Juliane Proelss & Denis Schweizer, 2018. "Hidden champions or black sheep? The role of underpricing in the German mini-bond market," Small Business Economics, Springer, vol. 50(2), pages 375-395, February.
  • Handle: RePEc:kap:sbusec:v:50:y:2018:i:2:d:10.1007_s11187-016-9833-7
    DOI: 10.1007/s11187-016-9833-7
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    Keywords

    Credit risk; Financing gap; Mini-bonds; Mittelstand; Ratings inflation; Small medium-sized enterprises (SMEs);

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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