Acquisitions in Bankruptcy: 363 Sales Versus Plan Sales and the Existence of Fire Sales

Posted: 15 Feb 2014 Last revised: 9 Jul 2014

See all articles by Anne M. Anderson

Anne M. Anderson

Middle Tennessee State

Yung-Yu Ma

Lehigh University - Department of Finance

Date Written: February 13, 2014

Abstract

The acquisition of bankrupt firms has increasingly taken place through section 363 of the U.S. Bankruptcy Code. Some scholars are critical of 363 sales because the process weakens creditors’ voting rights, takes place quickly, and has limited information disclosure compared with sales that take place in conjunction with a bankruptcy plan, i.e., “plan sales.” These factors potentially result in less active bidding and increased fire sales. Supporters of 363 sales contend that financial markets are sufficiently developed to accommodate such sales efficiently. Ours is the first study of which we are aware that compares 363 sales and plan sales to test these contentions empirically. Using a sample of large firms acquired in bankruptcy from 1996 to 2010, we find that 363 sales are associated with considerably lower sale prices. Further examination shows that the lower sale prices for 363 sales compared with plan sales are not due to the quick speed with which they take place, which could potentially result in less active bidding or greater information problems. Rather, the lower prices for 363 sales are associated with the reduced negotiating leverage that creditors experience in 363 sales as postulated by Elizabeth Rose in her 2006 study. We do not find systematic evidence of poor governance or restricted bidder participation in 363 sales, and while sale prices are negatively impacted by industry distress, the industry distress discount is not further exacerbated by 363 sales. Our results contribute to the understanding of bankruptcy fire sales and also have policy implications related to bankruptcy law.

Keywords: 363 Sale, Bankruptcy, Fire Sale

JEL Classification: G33, G34

Suggested Citation

Anderson, Anne M. and Ma, Yung-Yu, Acquisitions in Bankruptcy: 363 Sales Versus Plan Sales and the Existence of Fire Sales (February 13, 2014). American Bankruptcy Institute Law Review, Winter 2014, Volume 22(1), p.1-34, Available at SSRN: https://ssrn.com/abstract=2396191

Anne M. Anderson

Middle Tennessee State ( email )

TN
United States

Yung-Yu Ma (Contact Author)

Lehigh University - Department of Finance ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

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