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Bounded Rationality, Rights Offerings, and Optimal Subscription Prices


  • Wolfgang Breuer


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”.

Suggested Citation

  • Wolfgang Breuer, 2008. "Bounded Rationality, Rights Offerings, and Optimal Subscription Prices," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 60(3), pages 224-248, July.
  • Handle: RePEc:sbr:abstra:v:60:y:2008:i:3:p:224-248

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    Cited by:

    1. Narcis Tulbure, 2015. "Choice In Context: Rationality, Contingency And Risk In The Dividend Policy," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 388-395.

    More about this item


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

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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