Bidding in Mandatory Bankruptcy Auctions: Theory and Evidence

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