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Creditor Financing and Overbidding in Bankruptcy Auctions: Theory and Tests

48 Pages Posted: 17 Dec 2004 Last revised: 6 Jun 2013

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Karin S. Thorburn

Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: April 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

Eckbo, B. Espen and Thorburn, Karin S., Creditor Financing and Overbidding in Bankruptcy Auctions: Theory and Tests (April 2008). Journal of Corporate Finance, Vol. 15, pp. 10-29, 2009; Tuck School of Business Working Paper No. 2004-13. Available at SSRN: https://ssrn.com/abstract=635643 or http://dx.doi.org/10.2139/ssrn.635643

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Karin S. Thorburn

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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