45 Pages Posted: 17 Jan 2009 Last revised: 7 May 2009
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.
Keywords: Bankruptcy, auction, going-concern sale, piecemeal liquidation, fire-sale
JEL Classification: G33, G34
Suggested Citation: Suggested Citation
Eckbo, B. Espen and Thorburn, Karin S., Automatic Bankruptcy Auctions and Fire-Sales. Journal of Financial Economics (JFE), Vol. 89, pp. 404-422, 2008; Tuck School of Business Working Paper No. 2007-36. Available at SSRN: https://ssrn.com/abstract=1328964