Swedish House of Finance; Stockholm School of Economics - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); London School of Economics - Financial Markets (FMG) Group
Santa Clara University - Leavey School of Business; European Corporate Governance Institute (ECGI)
June 8, 2016
LSE FMG Discussion Paper No. 696
ECGI - Finance Working Paper No. 326/2012
We study transactions in which sellers fears 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.
Number of Pages in PDF File: 43
Keywords: Bilateral trade, asymmetric information, royalties, cash-equity offers, security design, contingent value rights, commissions, lemons problem
JEL Classification: D82, D86
Date posted: January 12, 2012 ; Last revised: June 14, 2016
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