Bounded Rationality, Rights Offerings, and Optimal Subscription Prices
Schmalenbach Business Review, Vol. 60, July 2008
26 Pages Posted: 12 Oct 2008
There are 2 versions of this paper
Bounded Rationality, Rights Offerings, and Optimal Subscription Prices
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: Suggested Citation
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