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

New players in entrepreneurial finance and why they are there

“…Mini-bonds are public bonds issued in special SME bond segments (Mietzner et al 2017). They were used as a financing instrument by SMEs or BMittelstand^-firms in the aftermath of the financial crisis where banks were either unwilling or unable to provide debt financing.…”

“…Mietzner et al (2017) is one of very few studies on mini-bonds. Using a German dataset in the period from 2010 to 2015, they show that rating agencies can create rating inflation by issuing overly favorable ratings.…”

The Issuance of German SME Bonds and its Impact on Operating Performance

“…This implies high idiosyncratic risks. Mietzner et al (2015) stated that there had been an apparent inflation of high-quality ratings issued by ratings agencies, a finding based on a comparison of ratings to a credit risk model. Therefore, low-quality firms had been able to enter the market in relatively high proportions and the authors found that high-quality firms had signaled their quality with higher underpricings.…”

“…Market participants such as exchanges, rating agencies, underwriters and investors were frequently blamed in the public media for being overly optimistic over the prospects of this market segment. The few research articles seem to partly confirm the claim by showing that credit spreads did not properly reflect the inherent risks (see for example Kinateder et al 2015or Schöning 2014 or that initial ratings appear to have been overoptimistic (Mietzner et al 2015).…”

“…Mietzner et al (2015) for example draw their conclusions from comparing initial ratings to realized default rates. 1 Ex post, it is evident that realized default rates are way higher than implied by initial ratings.…”