Land Auctions with Budget Constraints

36 Pages Posted: 14 Oct 2014 Last revised: 5 Sep 2016

See all articles by Jianfu Shen

Jianfu Shen

Hang Seng Management College

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

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Date Written: October 14, 2014

Abstract

This paper tests for the effects of financial constraints on open-bid English land auction prices and bids. It is argued that bidders’ ability to pay, taken as capital resources and/or capital budget constraints, influence bids and final auction prices. While high capital resource developers may elect to bid more than optimal to win auctions, or bidders may elect to pool resources in joint bidding, budget constraints imposed by firm-specific financial variables on the other hand are expected to restrict bids. Land auction data in Hong Kong are used to test systematically these predictions. It is found that a firm’s age, the number of winners in a joint bid, and firm status in the market are positively related to prices, all factors which may be attributed to a firm’s ability to finance the auction price. Firm size, internal funds, financing cost, debt capacity and existing capital expenditure are also shown to affect bids submitted in land auctions: firm size and internal funds are positively related to bid prices; while constrained debt capacity, financing cost and existing capital expenditure lower bids. The results are consistent with predictions that a firm’s financial constraints, and thus its effect on capital budgets, are relevant factors in predicting land auction outcomes. More generally, these findings confirm that similar financial factors that constrain corporate capital investment also influence directly acquisition of assets at auctions.

Keywords: Auction Theory, Budget constraints, Land Auctions, Bidding Strategy

JEL Classification: R00

Suggested Citation

Shen, Jianfu and Pretorius, Frederik and Chau, Kwong Wing, Land Auctions with Budget Constraints (October 14, 2014). Available at SSRN: https://ssrn.com/abstract=2509605 or http://dx.doi.org/10.2139/ssrn.2509605

Jianfu Shen (Contact Author)

Hang Seng Management College ( email )

Department of Economics & Finance
Hang Shin Link, Siu Lek Yuen, Shatin
Hong Kong
Hong Kong

Frederik Pretorius

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

Hong Kong
China

Kwong Wing Chau

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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