The Lemons Problem in Markets for Strategy

41 Pages Posted: 20 Aug 2015

See all articles by Mary J. Benner

Mary J. Benner

University of Minnesota - Twin Cities - Carlson School of Management

Todd Zenger

University of Utah

Date Written: August 18, 2015

Abstract

Research in corporate governance has predominantly focused on the moral hazard problem and governance mechanisms that mitigate it. In this conceptual paper, we instead focus on adverse selection as an alternative agency problem, emphasizing well-intentioned managers making strategic choices they believe will increase firm value, but facing difficulty informing capital market participants about the value of these choices. We suggest that more valuable strategies are more difficult for market participants to evaluate, and that pressures on managers to adopt easy-to-evaluate strategies can generate this adverse selection or ‘lemons’ problem. We argue that governance mechanisms designed to mitigate moral hazard operate differently here, in some cases exacerbating rather than solving the adverse selection problem. We further propose that firms with unique and complex strategies may migrate to private equity.

Keywords: Adverse selection, capital markets, corporate governance, intermediaries, moral hazard

JEL Classification: G34, G24, L1, L2, M10, M40, N20

Suggested Citation

Benner, Mary J. and Zenger, Todd R., The Lemons Problem in Markets for Strategy (August 18, 2015). Available at SSRN: https://ssrn.com/abstract=2647178 or http://dx.doi.org/10.2139/ssrn.2647178

Mary J. Benner

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Todd R. Zenger (Contact Author)

University of Utah ( email )

David Eccles School of Business
1655 East Campus Center Drive
Salt Lake City, UT 84112
United States
801 585-3981 (Phone)
801 581-7939 (Fax)

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