The Fairness Opinion Puzzle: Board Incentives, Information Asymmetry, and Bidding Strategy
Yasuhiro Ohta and
Kenton Yee
The Journal of Legal Studies, 2008, vol. 37, issue 1, 229-272
Abstract:
The proliferation of fairness opinions promulgating "wide as Texas" price ranges is not only a seeming regulatory failure, it is a puzzle: why do 60 percent of target boards solicit seemingly worthless documents not required by law, while 40 percent of their peers do not? This article explains a fairness opinion as "cheap talk" between a board and public shareholders. In the Fairness Opinion Game, a board issues a fairness opinion to communicate with two shareholder generations: existing shareholders voting on the proposed sale of their shares and potential aftermarket buyers who would buy if the present transaction falls through. The game yields two equilibria: one where the board issues no opinions and one where Texas-wide opinions emerge as equilibrium messages. We conclude that three factors determine a fairness opinion's width: the board's private incentives, information asymmetry between the board and shareholders, and transaction costs incurred by aftermarket buyers. (c) 2008 by The University of Chicago. All rights reserved.
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jlstud:v:37:y:2008:i:1:p:229-272
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