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

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  • Yasuhiro Ohta
  • Kenton K. Yee

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.

Suggested Citation

  • Yasuhiro Ohta & Kenton K. Yee, 2008. "The Fairness Opinion Puzzle: Board Incentives, Information Asymmetry, and Bidding Strategy," The Journal of Legal Studies, University of Chicago Press, vol. 37(1), pages 229-272, January.
  • Handle: RePEc:ucp:jlstud:v:37:y:2008:i:1:p:229-272
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    References listed on IDEAS

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    Cited by:

    1. La Mura, Pierfrancesco & Rapp, Marc Steffen & Schwetzler, Bernhard & Wilms, Andreas, 2011. "The certification hypothesis of fairness opinions for acquiring firms," International Review of Law and Economics, Elsevier, vol. 31(4), pages 240-248.
    2. repec:eee:jfinec:v:126:y:2017:i:3:p:614-634 is not listed on IDEAS

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