We study the certification role of fairness opinions in corporate transactions in a simple non-cooperative setting with asymmetric information and possibly misaligned managerial incentives, and discuss the effect of different regulatory scenarios. Specifically, we compare three settings: one in which no third-party fairness opinion is available, one in which the management is required to obtain a fairness opinion before any transaction, and one in which the management’s decision to require a fairness opinion is voluntary. We compare shareholder value in each of the three scenarios and discuss implications for the optimal design of regulatory eironments for fairness opinions.

Already a standard instrument in US transactions for some time, fairness opinionshave recently gained increasing popularity in other countries as well. While the benefitsof fairness opinions for board members are evident, as they contribute to reducethe risk of shareholder lawsuits, potential benefits for shareholders of the acquiring orthe target company are less obvious. We study the certification role of fairness opinionsin corporate transactions for shareholders of the acquiring company. In a setting withasymmetric information between management and shareholders and misaligned managerialincentives, we show that: (i) in a world without fairness opinions an optimalequilibrium, i.e., one in which the management realizes all “good” transactions and abstainsfrom making “bad” ones, is generally not feasible; (ii) in a world with mandatoryfairness opinions, the unique sequential equilibrium is optimal; and (iii) when fairnessopinions are voluntary there exists an optimal sequential equilibrium but other, nonoptimalsequential equilibria may also exist. We also discuss the implications of theabove results to issues of optimal regulation of takeovers.

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