Smart buyers

Mike Burkart and Samuel Lee

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study transactions in which sellers fear being underpaid because their outside option is better known to the buyer. We rationalize various observed contracts as solutions to such smart buyer problems. Key to these solutions is granting the seller upside participation. In contrast, the lemons problem calls for granting the buyer downside protection. But, in either case, the seller (buyer) receives a convex (concave) claim. Thus, contracts usually associated with the lemons problem, such as debt or cash-equity offers, can be equally well manifestations of the smart buyer problem, although the two information asymmetries have opposite cross-sectional implications.

JEL-codes: E6 F3 G3 (search for similar items in EconPapers)
Date: 2016-09-01
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Published in Review of Corporate Finance Studies, 1, September, 2016, 5(2), pp. 239 - 270. ISSN: 2046-9128

Downloads: (external link)
http://eprints.lse.ac.uk/69537/ Open access version. (application/pdf)

Related works:
Journal Article: Smart Buyers (2016)
Working Paper: Smart Buyers (2012)
Working Paper: Smart buyers (2012)
Working Paper: Smart Buyers (2012)
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