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Bounded Rationality, Rights Offerings, and Optimal Subscription Prices

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  • Wolfgang Breuer
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    Abstract

    In an asymmetric information context with bounded rationality, investors’ loss aversion, mental accounting and buy-and-hold behavior may create opportunities for good-type firms to signal their project quality by choosing lower issuance prices at rights offerings than bad-type firms do. Bad firms are prevented from imitating better ones, as their doing so would induce reference price violations with a loss in utility that would exceed any corresponding additional proceeds from the sale of subscription rights. As a by-product, we have, on average, found positive announcement effects from rights offerings. Our behavioral approach may help to explain differing empirical findings across countries and can thus be interpreted as a (quite rudimentary) contribution to the newly developing field of “cultural corporate finance”.

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    Bibliographic Info

    Article provided by LMU Munich School of Management in its journal Schmalenbach Business Review.

    Volume (Year): 60 (2008)
    Issue (Month): 3 (July)
    Pages: 224-248

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    Handle: RePEc:sbr:abstra:v:60:y:2008:i:3:p:224-248

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    Related research

    Keywords: Bounded Rationality; Cultural Corporate Finance; Loss Aversion; Mental Accounting; Rights Issues; Signalling;

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