Smart Buyers

LSE FMG Discussion Paper No. 696

ECGI - Finance Working Paper No. 326/2012

43 Pages Posted: 12 Jan 2012 Last revised: 14 Jun 2016

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Samuel Lee

Santa Clara University - Leavey School of Business; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: June 8, 2016

Abstract

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.

Keywords: Bilateral trade, asymmetric information, royalties, cash-equity offers, security design, contingent value rights, commissions, lemons problem

JEL Classification: D82, D86

Suggested Citation

Burkart, Mike and Lee, Samuel, Smart Buyers (June 8, 2016). LSE FMG Discussion Paper No. 696; ECGI - Finance Working Paper No. 326/2012. Available at SSRN: https://ssrn.com/abstract=1983500 or http://dx.doi.org/10.2139/ssrn.1983500

Mike C. Burkart

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

HOME PAGE: http://www.cepr.org/default_static.htm

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Samuel Lee (Contact Author)

Santa Clara University - Leavey School of Business

500 El Camino Real
Santa Clara, CA California 95053
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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