Working Paper: CEPR ID: DP3240
Authors: B. Espen Eckbo; Karin S. Thorburn
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: auctions; bankruptcy; firesales; overbidding
JEL Codes: D44; G33; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank financing (G21) | overbidding (D44) |
| overbidding (D44) | auction price (D44) |
| bank financing (G21) | auction price (D44) |
| bank's liquidation recovery rate (G33) | overbidding (D44) |
| bank's liquidation recovery rate (G33) | auction premium (D44) |
| overbidding (D44) | auction premium (D44) |
| industry distress (L99) | auction premium (D44) |