Security-bid Auctions with Information Acquisition

Abstract

We study auctions in which buyers covertly acquire information at some cost and then bid securities contingent on the asset's realized value to them. In first- and second-price auctions, steeper securities lead to lower marginal returns to information and potentially lower revenues. We then consider the revenue-maximizing linear mechanism. The mechanism is efficient. The winner pays in cash if their expected values exceed a threshold and pays in stock otherwise. The threshold decreases as the marginal cost of acquiring information increases. Our empirical analysis supports the model's implications that stock payments are associated with lower takeover synergies and information costs.

Keywords: Information Acquisition, Securities, Auctions, Contingent Mechanisms