Creditor Financing and Overbidding in Bankruptcy Auctions: Theory and Test

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Finance Papers
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bankruptcy
auction
overbidding
creditor financing
allocative efficiency
going-concern sale
piecemeal liquidation
operating performance
Bankruptcy Law
Finance
Finance and Financial Management
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Eckbo, B. Espen
Thorburn, Karin S
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Abstract

We present unique empirical tests for auction overbidding using data from Sweden's auction bankruptcy system. The main creditor (a bank) can neither bid in the auction nor refuse to sell in order to support a minimum price. However, we argue that the bank may increase its expected revenue by financing a bidder in return for a joint bid strategy, and we show that the optimal coalition bid exceeds the bidder's private valuation (overbidding) by an amount that is increasing in the bank's ex ante debt impairment. We find that bank–bidder financing arrangements are common, and our cross-sectional regressions show that winning bids are increasing in the bank-debt impairment as predicted. While, in theory, overbidding may result in the coalition winning against a more efficient rival bidder, our evidence on post-bankruptcy operating performance fails to support such allocative inefficiency effects. We also find that restructurings by bank-financed bidders are relatively risky as they have greater bankruptcy refiling rates, irrespective of the coalition's overbidding incentive.

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2009-02-01
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Journal of Corporate Finance
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Author Karin S. Thorburn is a full time faculty member of Norwegian School of Economics. She is a visiting professor in the Finance Department of the Wharton School at the University of Pennsylvania.
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