Investor familiarity and corporate debt financing conditions

Leonie Herrmann and Oscar A. Stolper

Finance Research Letters, 2017, vol. 23, issue C, 263-268

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: D22 D83 G02 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:23:y:2017:i:c:p:263-268

DOI: 10.1016/j.frl.2017.08.004

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