Finance Papers

Document Type

Journal Article

Date of this Version

9-2008

Publication Source

Journal of Financial Economics

Volume

89

Issue

3

Start Page

404

Last Page

422

DOI

10.1016/j.jfineco.2007.10.003

Abstract

We test for fire-sale tendencies in automatic bankruptcy auctions. We find evidence consistent with fire-sale discounts when the auction leads to piecemeal liquidation, but not when the bankrupt firm is acquired as a going concern. Neither industry-wide distress nor the industry affiliation of the buyer affect prices in going-concern sales. Bids are often structured as leveraged buyouts, which relaxes liquidity constraints and reduces bidder underinvestment incentives in the presence of debt overhang. Prices in “prepack” auctions (sales agreements negotiated prior to bankruptcy filing) are on average lower than for in-auction going-concern sales, suggesting that prepacks may help preempt excessive liquidation when the auction is expected to be illiquid. Prepack targets have a greater industry-adjusted probability of refiling for bankruptcy, indicating that liquidation preemption is a risky strategy.

Copyright/Permission Statement

© 2008. 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, going-concern sale, piecemeal liquidation, fire-sale

Embargo Date

7-9-2011

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Date Posted: 27 November 2017

This document has been peer reviewed.