Bounded Rationality, Rights Offerings, and Optimal Subscription Prices

Schmalenbach Business Review, Vol. 60, July 2008

26 Pages Posted: 12 Oct 2008

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2008

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".

Keywords: Bounded Rationality, Cultural Corporate Finance, Loss Aversion, Mental

JEL Classification: D82, G12, G32

Suggested Citation

Breuer, Wolfgang, Bounded Rationality, Rights Offerings, and Optimal Subscription Prices (July 1, 2008). Schmalenbach Business Review, Vol. 60, July 2008 , Available at SSRN: https://ssrn.com/abstract=1282082

Wolfgang Breuer (Contact Author)

RWTH Aachen University ( email )

Templergraben 55
D-52056 Aachen, 52056
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
75
Abstract Views
1,097
Rank
221,631
PlumX Metrics