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Smart Buyers

Author

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  • Mike Burkart
  • Samuel Lee

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.

Suggested Citation

  • Mike Burkart & Samuel Lee, 2016. "Smart Buyers," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 5(2), pages 239-270.
    • Handle: RePEc:oup:rcorpf:v:5:y:2016:i:2:p:239-270.
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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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