Finance Papers

Document Type

Journal Article

Date of this Version

2-2009

Publication Source

Journal of Corporate Finance

Volume

15

Issue

1

Start Page

10

Last Page

29

DOI

10.1016/j.jcorpfin.2008.04.005

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.

Copyright/Permission Statement

© 2009. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Comments

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.

Keywords

bankruptcy, auction, overbidding, creditor financing, allocative efficiency, going-concern sale, piecemeal liquidation, operating performance

Embargo Date

4-24-2010

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Date Posted: 27 November 2017

This document has been peer reviewed.