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

Mark Mietzner (), Juliane Proelss () and Denis Schweizer ()
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Mark Mietzner: Zeppelin University
Juliane Proelss: Concordia University
Denis Schweizer: Concordia University

Small Business Economics, 2018, vol. 50, issue 2, 375-395

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.

Keywords: Credit risk; Financing gap; Mini-bonds; Mittelstand; Ratings inflation; Small medium-sized enterprises (SMEs) (search for similar items in EconPapers)
JEL-codes: G12 G30 G32 (search for similar items in EconPapers)
Date: 2018
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