Management Buy-out Pricing Model: A Fairness Preference Perspective

Abstract

In order to determine the effective and reasonable management buyout price, considered of asymmetric infor- mation, this paper investigated the shareholders' decision-making behavior during the management buyout pricing proc- ess under a fairness preferences perspective. The conclusions in this paper were�1) The greater the value of the option, the smaller the critical probability of management buy-out success, namely smaller posteriori probability of the original shareholders to the management; and 2) MBO share is affected by inequity aversion. In order to enhance utility, manage- ment with higher degree of inequity aversion would increase the probability of cheating and moral hazard. The contribu- tions of this paper were: the signal display principle of option value has been found; and studied the fairness preference during the process, psychological disutility produced by fairness preference has a crowding-out effect on managerial own- ership's incentive contracts.