Management Buy-out Pricing Model: A Fairness Preference Perspective

ABSTRACT

In order to determine the effective and reasonable management buyout price, considered of asymmetric information, this paper investigated the shareholders’ decision-making behavior during the management buyout pricing process 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, management with higher degree of inequity aversion would increase the probability of cheating and moral hazard. The contributions 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 ownership’s incentive contracts.

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