Minibond and earnings management: leveraging the signaling effect of minibond listing

Abstract

Minibonds are a hybrid between bank debt and bond issuance introduced in Italy to expand the range of possible financing resources available to unlisted enterprises. This peculiar debt security was introduced as part of a regulatory reform in 2012 to diversify funding sources and facilitate access to capital markets for Small and Medium Enterprises (SMEs). In this study, we investigate whether firms that decide to issue and list a minibond engage in earnings management (EM) to leverage the growth-signaling effect generated by the listing of this security. Listing bonds on a financial market is not mandatory, but a strategic choice. Collecting a sample of 136 minibond listings during 2013–2020, we use panel analysis to show that issuers tend to manage their earnings in the year of listing. We argue that this behavior is undertaken in order to provide a better representation of their economic and financial situation and consequently to better impress current or future stakeholders. Moreover, we also find that larger minibond size partially discourages EM, thus confirming the role of debt as a means of control over management. Overall, we argue that stakeholders should be aware that, even though minibond issuers are sound firms on average, they tend to inflate their earnings in the year of listing in order to reinforce the signaling effect of the quotation.