According to the theory of asymmetric information, the financially weakest firms self-select into bond markets. The paper investigates the relevance of this 'adverse selection' by relating Italian SMEs' propensity to issue minibonds with the degree of information asymmetry regarding their financial soundness. This is inferred from the Bank of Italy's In-house Credit Assessment System (ICAS), distinguishing public information (based on financial statements) from 'private' information (based on credit history).
The results show positive (rather than adverse) selection: holding public information constant, firms with better private fundamentals are more likely to access minibond markets. Additionally, credit conditions improve for issuers following the bond placement. These results are consistent with a model, developed in the paper, where firms use bond market lending to signal their credit quality to outside stakeholders.
