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Overbidding versus Fire-Sales in Bankruptcy Auctions

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  • Eckbo, B Espen
  • Thorburn, Karin S

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.

Suggested Citation

  • Eckbo, B Espen & Thorburn, Karin S, 2002. "Overbidding versus Fire-Sales in Bankruptcy Auctions," CEPR Discussion Papers 3240, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3240
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Espen Eckbo, B. & Thorburn, Karin S., 2003. "Control benefits and CEO discipline in automatic bankruptcy auctions," Journal of Financial Economics, Elsevier, vol. 69(1), pages 227-258, July.
    2. Ethan Cohen-Cole, 2007. "Asset liquidity, debt valuation and credit risk," Risk and Policy Analysis Unit Working Paper QAU07-5, Federal Reserve Bank of Boston.
    3. Arturo Bris & Ivo Welch & Ning Zhu, 2005. "The Costs of Bankruptcy," Yale School of Management Working Papers amz2375, Yale School of Management, revised 21 Sep 2009.

    More about this item

    Keywords

    auctions; bankruptcy; fire-sales; overbidding;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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