Creditor Financing and Overbidding in Bankruptcy Auctions: Theory and Tests
Journal of Corporate Finance, Vol. 15, pp. 10-29, 2009
Tuck School of Business Working Paper No. 2004-13
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 68/2005
54 Pages Posted: 17 Dec 2004 Last revised: 9 Nov 2018
Date Written: April 1, 2008
Abstract
We present unique empirical tests for overbidding using data from Sweden's auction bankruptcy system. The main creditor (a bank) can neither bid in the auction nor refuse to sell in order to support a minimum price. We argue that the bank may increase its expected revenue by financing a bidder in return for a joint bid strategy. The optimal coalition bid exceeds the bidder's private valuation (overbidding) by an amount that is increasing in the bank's ex ante debt impairment. We find that bank-bidder financing arrangements are common, and our cross-sectional regressions show that winning bids are increasing in the bank-debt impairment as predicted. While, in theory, overbidding may result in the coalition winning against a more efficient rival bidder, our evidence on post-bankruptcy operating performance fails to support such allocative inefficiency effects. We also find that restructurings by bank-financed bidders are relatively risky as they have greater bankruptcy refiling rates, irrespective of the coalition's overbidding incentive.
Keywords: Bankruptcy, auctions, overbidding, fire sale, saleback, governance, premiums, recovery rates, bank bidding
JEL Classification: D44, G21, G32, G33, G34
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Debt Enforcement Around the World
By Simeon Djankov, Oliver Hart, ...
-
Debt Enforcement Around the World
By Simeon Djankov, Oliver Hart, ...
-
By Arturo Bris, Ivo Welch, ...
-
By Stuart C. Gilson, Edith S. Hotchkiss, ...
-
By Lawrence A. Weiss and Karen H. Wruck
-
Asset Efficiency and Reallocation Decisions of Bankrupt Firms
-
Bankruptcy Around the World: Explanations of its Relative Use
By Stijn Claessens and Leora F. Klapper
-
Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany and the UK
By Sergei Davydenko and Julian R. Franks
-
Vulture Investors and the Market for Control of Distressed Firms