Market Sentiments, Winner's Curse, and Bidding Outcomes in Land Auctions

38 Pages Posted: 22 Oct 2010 Last revised: 3 Jun 2012

See all articles by K. S. Maurice Tse

K. S. Maurice Tse

The University of Hong Kong - School of Economics and Finance

Frederik Pretorius

The University of Hong Kong - Department of Real Estate and Construction

K.W. Chau

The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics

Date Written: March 15, 2009

Abstract

This paper empirically tests auction theory by examining how the stock market evaluates the outcome of open-bid English auctions of rights to develop residential real estate projects in Hong Kong. To do so, we deconstruct the complexity surrounding actual auction events, and empirically isolate the influence of conflicting auction theory predictions using data from expert opinion around auction events, actual auction event and outcome data, and stock market data. The empirical findings include (1) with increasing uncertainty bidders reduce bids, thus confirming predictions following the winner's curse thesis; (2) joint bidding does not lead to increased bids based on pooled ("better") information, but instead leads to reduced competition; while increased competition leads to increased prices at auction, as expected; (3) the market interprets auction outcomes as information events which function to signal developers' expectations about future market prospects; but if the winning bid is considered too high, this interpretation is revised to that of the winner's curse; (4) with joint bidding and winning, the market's response to joint winners is better explained by concern for winner's curse (despite supposed better informed bids) than the acquisition of a below cost development project following reduced competition at auction; and (5) the market interprets increased competition at auction as indicator of the future direction of property price movements in the secondary market - the more intense the competition, the more positive the future prospect of the property market are seen to be.

Keywords: Auction, Bidding Outcome, Market Sentiments, Winner's Curse

JEL Classification: D44, D83, R37

Suggested Citation

Tse, Maurice K. S. and Pretorius, Frederik and Chau, Kwong Wing, Market Sentiments, Winner's Curse, and Bidding Outcomes in Land Auctions (March 15, 2009). Journal of Real Estate Finance and Economics, 42 (2), 247-274, Available at SSRN: https://ssrn.com/abstract=1695567

Maurice K. S. Tse

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
011-852-2857-8636 (Phone)
011-852-2548-1152 (Fax)

Frederik Pretorius

The University of Hong Kong - Department of Real Estate and Construction ( email )

Hong Kong
China

Kwong Wing Chau (Contact Author)

The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics ( email )

Ronald Coase Centre for Property Rights Research
Pokfulam Road
Hong Kong
Hong Kong
(852)28592128 (Phone)
(852)25599457 (Fax)

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