Bidding in Mandatory Bankruptcy Auctions: Theory and Evidence

Bjorn Eckbo () and Karin Thorburn ()

No 4873, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse bidding incentives and present evidence on takeover premiums in Sweden?s mandatory bankruptcy auctions. The typical auction attracts multiple bidders and results in the firm being sold as a going concern. We model the incentive of the bankrupt firm?s main creditor (a bank) to influence the auction outcome. Rules prevent the bank from bidding directly. However, the bank often finances a bidder in the auction, relaxing liquidity constraints. We show that the optimal bid strategy for a bank-bidder coalition mimics the monopolist sales price. In the region where the bank?s debt is impaired, this optimal bid exceeds the private valuation of the bank?s coalition partner (overbidding). We derive new and testable cross-sectional predictions of the overbidding theory, and provide empirical support using auction premiums as dependent variable. Interestingly, there is no evidence that the auctions produce lower (fire-sale) premiums when economic conditions lead one to expect relatively low intra-industry auction demand. Moreover, premiums in transactions where insiders repurchase the firm (salebacks) are on average indistinguishable from premiums in sales to company outsiders, which fails to support self-dealing arguments. Overall, the evidence is consistent with the average auction producing a relatively efficient allocation of the bankrupt firm

Keywords: Bankruptcy; Auctions; Overbidding; Fire-sale; Saleback; Efficiency; Governance (search for similar items in EconPapers)
JEL-codes: D44 G21 G32 G33 G34 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Bidding in mandatory bankruptcy auctions: Theory and evidence (2004)
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