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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.

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  • 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
    DOI: 10.1086/519964
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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. Lobe, Sebasian & Schenk, Nils-Christian, 2009. "Fairness Opinions and Capital Markets: Evidence from Germany, Switzerland and Austria," ECMI Papers 1596, Centre for European Policy Studies.
    3. Mehmet Ekmekci & Nenad Kos, 2014. "Value of Information and Fairness Opinions in Takeovers," Working Papers 510, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Levit, Doron, 2017. "Advising shareholders in takeovers," Journal of Financial Economics, Elsevier, vol. 126(3), pages 614-634.

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