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The Fairness Opinion Puzzle: Board Incentives, Information Asymmetry, and Bidding Strategy

Listed author(s):
  • Yasuhiro Ohta
  • Kenton K. Yee

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.

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File URL: http://dx.doi.org/10.1086/519964
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Article provided by University of Chicago Press in its journal The Journal of Legal Studies.

Volume (Year): 37 (2008)
Issue (Month): 1 (01)
Pages: 229-272

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Handle: RePEc:ucp:jlstud:v:37:y:2008:i:1:p:229-272
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLS/

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