Economic Effects of Auction Bankruptcy

Abstract

We survey empirical research on the Swedish auction bankruptcy system, which requires that filing firms are put up for sale in an auction. The bids determine whether the firm will be liquidated piecemeal or continued as a going concern. The auctions are competitive and there is little evidence of fire-sales. Three-quarters of the firms survive the auction with their core assets intact. In contrast to evidence on reorganizations under Chapter 11 in the U.S., buyers in Sweden restructure the auctioned firms well enough for these firms to perform at par with industry rivals. The CEOs of auctioned firms suffer dramatic personal bankruptcy costs. Nevertheless, there is no indication that this results in value-destroying risk shifting behaviour prior to filing. Overall, the Swedish experience suggests that greater reliance on the auction mechanism, seen recently also in the U.S., enhances economic efficiency.

Keywords: Bankruptcy, auction, reorganization, liquidation, risk-shifting, asset substitution, fire-sale, bankruptcy costs

JEL Classification: G33, G34, K22