Investor familiarity and corporate debt financing conditions

• Published in: Finance research letters Vol. 23; pp. 263 - 268
• Main Authors: Herrmann, Leonie, Stolper, Oscar A.
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.11.2017
• Subjects: Company visibility; Corporate bonds; Cost of capital; Cost of debt; Investor familiarity; Retail investors; Corporate bonds; Investor familiarity; Retail investors; D22; Cost of capital; Cost of debt; G02; Company visibility; D83
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2017.08.004

•We contribute to the research on how retail investors value corporate bonds.•Less familiar firms carry significant risk premia also in debt financing.•Firms’ general recognition and local visibility reduce credit spreads significantly.•Our results suggest heuristic decision behaviour among retail investors. 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.