Do Bondholder Relations Efforts Pay Off for German Firms? An Empirical Approach

This study investigates the link between corporate disclosure and cost of debt on the German corporate bond market. With a large number of medium-sized bond issuers emerging over the last few years, transparency considerations have become increasingly important. Until now, there has been mainly anecdotal evidence among German bond issuers on whether an increase in disclosure is actually perceived by market participants and, consequently, reflected in lower yield spreads. In contrast to previous studies in this field, I use a very specific bondholder relations measure in addition to a conventional disclosure index. This enables me to examine the relationship between informational efforts directed at the bond market and disclosure that is primarily targeted at shareholders, as respects their influence on bond values. Using an exhaustive list of firm- and bond-related control variables, the multivariate findings confirm a strong negative relationship between disclosure and cost of debt, nearly irrespective of which ranking variable is used. Applying various alternative estimations, I find these results to be robust to potential endogeneity biases.