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Auctions, Real Options Valuation, And Privatization

  • ALAA EL-SHAZLY

    ()

    (Department of Economics, Faculty of Economics and Political Science, Cairo University, Cairo 12211, Egypt)

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    This article studies competitive bidding by strategic investors to buy enterprises that are being privatized through sealed-bid auctions. The bidders use a real options approach to enterprise valuation that accounts for asset quality given their private information. It is shown that the optimal bidding strategy under first-price sealed-bid auctions defines a Bayesian Nash equilibrium in which each strategic investor bids only a fraction of its prior valuation and competition decreases the bidder's profit margin. The greater the transparency and information disclosure on asset quality, the higher the seller's expected receipts will be.

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    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Game Theory Review.

    Volume (Year): 13 (2011)
    Issue (Month): 04 ()
    Pages: 403-415

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    Handle: RePEc:wsi:igtrxx:v:13:y:2011:i:04:p:403-415
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