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Overbidding versus Fire-Sales in Bankruptcy Auctions

  • Eckbo, B Espen
  • Thorburn, Karin S

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3240.

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Date of creation: Mar 2002
Date of revision:
Handle: RePEc:cpr:ceprdp:3240
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  1. Aghion, P. & Hart, O. & Moore, J., 1992. "The Economics of Bankruptcy Reform," Working papers 92-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Thorburn, Karin S., 2000. "Bankruptcy auctions: costs, debt recovery, and firm survival," Journal of Financial Economics, Elsevier, vol. 58(3), pages 337-368, December.
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  11. Betton, Sandra & Eckbo, B Espen, 2000. "Toeholds, Bid Jumps, and Expected Payoffs in Takeovers," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 841-82.
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  13. Jeremy Bulow & Ming Huang & Paul Klemperer, 1999. "Toeholds and Takeovers," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 427-454, June.
  14. Franks, Julian R. & Torous, Walter N., 1994. "A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations," Journal of Financial Economics, Elsevier, vol. 35(3), pages 349-370, June.
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