Overbidding versus Fire-Sales in Bankruptcy Auctions

Bjorn Eckbo () and Karin Thorburn ()

No 3240, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse bidding incentives of the main creditors (banks) in Swedish bankruptcy auctions. Lacking a direct mechanism for enforcing its seller reservation price, the bank offers financing to a potential bidder in return for a bid strategy that maximizes the expected profits of the bank-bidder coalition. The coalition overbids (in excess of the coalition's private valuation) by an amount that decreases during the bank's ?liquidation recovery?. This is the recovery amount if the bank were to receive the piecemeal liquidation value announced by the auctioneer at the start of the auction. Since both the liquidation recovery and the final going-concern auction premium are observable, the overbidding theory is testable. We perform a large-sample, cross-sectional analysis where overbidding is pitched against asset fire-sale arguments. The latter hold that auctions tend to produce lower going-concern premiums when taking place during industry-wide financial distress, or when the firm is sold back to old owners or to industry outsiders. The evidence is strongly consistent with overbidding but provides little support for asset fire-sale arguments.

Keywords: Fire-sales; Overbidding; Auctions; Bankruptcy (search for similar items in EconPapers)
JEL-codes: D44 G33 G34 (search for similar items in EconPapers)
Date: 2002-03
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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