Effects of Seller's Information Disclosure in Equity Auctions Requiring Post-Auction Investment

21 Pages Posted: 15 Jul 2017  

Takeharu Sogo

Faculty of Economics, Osaka University of Economics

Date Written: July 9, 2017

Abstract

We consider a moral hazard issue inherent in the equity auctions of assets such as oil & gas leases and corporate takeovers. After the auction, the winning bidder decides whether to make follow-up investments in the acquired asset and makes the equity payment out of the revenue from it according to the auction outcome. Before the auction, the seller holds private information about the possible returns on that investment and must decide whether to disclose it. Larger equity payments undermine incentives to invest, reducing the impact of information revealed by the seller on expected values of the asset to a winning bidder. Thus, information disclosure makes bids less aggressive in expectation. Expected seller revenues may be higher when she does not disclose her private information than when she commits to publicly announcing it regardless of whether it is good or bad.

Keywords: Information disclosure, Equity auctions, Post-auction investment, Moral hazard

JEL Classification: D44, D82, G10

Suggested Citation

Sogo, Takeharu, Effects of Seller's Information Disclosure in Equity Auctions Requiring Post-Auction Investment (July 9, 2017). Available at SSRN: https://ssrn.com/abstract=2999040

Takeharu Sogo (Contact Author)

Faculty of Economics, Osaka University of Economics ( email )

2-2-8 Osumi
Higashiyokogawa-ku
Osaka
Japan

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