In this study the irrelevance school of issue price is challenged and a theoretical model of optimal allocation ratio which explicitly takes into account various costs associated with rights offerings is developed.

The empirical results reveal the importance of owners' subscription cost, the issuing firm's dividend policy, as well as the cost of administering share transfers in the determination of allocation ratio. The entirety of these results points, therefore, to the rejection of the irrelevance school of issue price and lend support to the three relevance school theories: the dividend policy cost theory of Levy and Sarnat, the transfer cost hypothesis of Beranek, and the cost of owner subscription hypothesis developed in this study.