We estimate a cross-sectional model of the yield spreads of German Mittelstand bonds as a function of liquidity measures as well as a number of variables that control for both the characteristics of the issuing firm and the bond characteristics. Our results show a significant positive effect of illiquidity on the yield spread, which persists after controlling for the risk of the bond. Economically, the size of the liquidity premium of Mittelstand bonds is approximately twice the size of speculative grade US corporate bonds. Our findings are robust to different measures of liquidity and potential endogeneity biases.
