If the Announcement of a New Equity Offering Causes Current

question 71

Multiple Choice

If the announcement of a new equity offering causes current equity values to drop,then signaling theory would predict that:

• A) supply of equity will outstrip demand.
• B) management knows the issue to be overpriced.
• C) the firm has no attractive investment opportunities.
• D) underwriters charge too high a spread.

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Definitions:

Bounded Rationality

A theory proposing that people base their choices on the restricted data they have access to and within the limitations of their cognitive abilities.

Availability Phenomena

A cognitive bias where individuals give undue weight to information that is readily available to them when making decisions.

Limited Search

The process of looking for information or solutions with restrictions, often due to time, resources, or access limitations.

Bounded Rationality Model

A model that suggests that individuals make decisions based on a limited amount of information and through a simplification of complex problems, constrained by their cognitive limitations.