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The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions

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  • Matthew J. Clayton
  • S. Abraham Ravid
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    Abstract

    This paper investigates how firms’ bidding behavior in various auctions is affected by capital structure. A theoretical model is developed where the first price sealed bid and the English auction are examined. We find as debt levels increase, firms tend to

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    File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99055.pdf
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    Bibliographic Info

    Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-055.

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    Date of creation: Dec 1999
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    Handle: RePEc:fth:nystfi:99-055

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    Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
    Phone: (212) 998-0100
    Web page: http://w4.stern.nyu.edu/finance/
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    1. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-53, June.
    2. Maskin, Eric S & Riley, Joan G, 1985. "Auction Theory with Private Values," American Economic Review, American Economic Association, vol. 75(2), pages 150-55, May.
    3. Peter Cramton, 1997. "The FCC Spectrum Auctions: An Early Assessment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(3), pages 431-495, 09.
    4. J. Riley & E. Maskin, 1981. "Optimal Auctions with Risk Averse Buyers," Working papers 311, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Robert H. Porter, 1992. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," Discussion Papers 1008, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    7. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
    8. Milgrom, Paul, 1989. "Auctions and Bidding: A Primer," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 3-22, Summer.
    9. Franklin Allen, . "Capital Structure and Imperfect Competition in Product Markets (Revision of 20-85, 24-84)," Rodney L. White Center for Financial Research Working Papers 11-87, Wharton School Rodney L. White Center for Financial Research.
    10. Holt, Charles A, Jr, 1980. "Competitive Bidding for Contracts under Alternative Auction Procedures," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 433-45, June.
    11. John G. Riley & William Samuelson, 1979. "Optimal Auctions," UCLA Economics Working Papers 152, UCLA Department of Economics.
    12. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
    13. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    14. French, Kenneth R & McCormick, Robert E, 1984. "Sealed Bids, Sunk Costs, and the Process of Competition," The Journal of Business, University of Chicago Press, vol. 57(4), pages 417-41, October.
    15. R. Preston McAfee & John McMillan, 1996. "Analyzing the Airwaves Auction," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 159-175, Winter.
    16. Maskin, Eric & Riley, John, 2000. "Asymmetric Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 413-38, July.
    17. Matthew J. Clayton, 1999. "Debt, Investment, and Product Market Competition," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-056, New York University, Leonard N. Stern School of Business-.
    18. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    19. Kim, Moshe & Maksimovic, Vojislav, 1990. " Debt and Input Misallocation," Journal of Finance, American Finance Association, vol. 45(3), pages 795-816, July.
    20. S. Abraham Ravid, 1997. "Leverage Changes and Product Pricing Incentives -- A Tax Induced Analysis," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-055, New York University, Leonard N. Stern School of Business-.
    21. Wilson, Robert, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 511-18, October.
    22. Chowdhry, Bhagwan & Nanda, Vikram, 1993. " The Strategic Role of Debt in Takeover Contests," Journal of Finance, American Finance Association, vol. 48(2), pages 731-45, June.
    23. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
    24. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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