The Fairness Opinion Puzzle: Board Incentives, Information Asymmetry, and Bidding Strategy

We start by asking an empirically motivated question: Why do 60% of target boards voluntarily solicit and pay for seemingly worthless `Texas-wide' fairness opinions while 40% of their peers do not? Our new insight is that target boards speak to more than one shareholder generation through fairness opinions. We model fairness opinions as a "cheap talk" game between a board of directors and public shareholders. In the core 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 after-market buyers who would buy if the present transaction fails. The game yields two distinct equilibria: one where the board issues no fairness opinions and one where Texas-wide fairness opinions emerge as equilibrium messages. The core game assumes that: (i) shareholders know the status of the board's private incentive; (ii) the proposed buyer sets a fixed bid equal to the ex ante expected value of the firm; and (iii) shareholders have no information about the target that the board does not have. We relax each of these three assumptions and prove that the conclusions drawn from the core game continue to hold. We conclude that three factors determine the width of fairness opinions: the board's private incentives; information asymmetry between the board and shareholders; and transactions costs incurred by after-market buyers if the current bid fails.