TY - JOUR

T1 - Pricing effects when competitors arrive

T2 - The case of discount certificates in Germany

AU - Schertler, Andrea

PY - 2016/7/1

Y1 - 2016/7/1

N2 - This article investigates how overpricing of outstanding certificates, also called master certificates, changes when competing products that duplicate the features of master certificates are issued. I argue that competition effects may be reverted and overpricing may increase rather than decrease after competitors arrive, when retail investors fail to detect implications of credit risk differences on certificates' values. Using difference-in-differences estimations on matched samples, I find that overpricing of master certificates decreases after the competing products have been issued, but only when the master issuer's credit risk is lower than that of the duplicate issuer, while it increases when the credit risk difference is positive. These findings are robust to controlling for retail investors' demand in various ways. Thus, the study indicates that retail investors' failure to detect the value implications of issuers' credit risk can undermine product competition.

AB - This article investigates how overpricing of outstanding certificates, also called master certificates, changes when competing products that duplicate the features of master certificates are issued. I argue that competition effects may be reverted and overpricing may increase rather than decrease after competitors arrive, when retail investors fail to detect implications of credit risk differences on certificates' values. Using difference-in-differences estimations on matched samples, I find that overpricing of master certificates decreases after the competing products have been issued, but only when the master issuer's credit risk is lower than that of the duplicate issuer, while it increases when the credit risk difference is positive. These findings are robust to controlling for retail investors' demand in various ways. Thus, the study indicates that retail investors' failure to detect the value implications of issuers' credit risk can undermine product competition.

KW - Management studies

KW - Discount certificate

KW - Duplication

KW - Product competition

KW - Structured financial product

U2 - 10.1016/j.jbankfin.2016.03.009

DO - 10.1016/j.jbankfin.2016.03.009

M3 - Journal articles

VL - 68

SP - 84

EP - 99

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

ER -