Sale-Backs in Bankruptcy
University of Houston - Department of Finance, C.T. Bauer College of Business
University of Minnesota - Twin Cities - Carlson School of Management
Journal of Law, Economics and Organization, Vol. 23, No. 2, October 2007
When bankrupt firms are sold, they are often repurchased by their former owner or manager. These insiders are by default better informed than outsiders about the true value of the firm or its assets, so other potential buyers must worry about overpaying if they win. The presence of insiders may thus have a chilling effect on the bidding. We ask how insiders should be treated in bankruptcy sales: Should they be allowed to submit bids? If so, under what conditions? We derive properties of an optimal sale procedure and show that it must be biased against insiders. Specifically, it should be harder for insiders to win with low bids than for outsiders. We show that the market tests that are routinely required in bankruptcy sales are sub-optimal, since they treat all potential buyers alike and forgo the benefits of biasing the procedure against insiders.
Number of Pages in PDF File: 32
Keywords: Bankruptcy, Liquidation, Chapter 11, Section 363 Sales, Sale-Backs
JEL Classification: G33, G38
Date posted: January 11, 2007
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