48 Pages Posted: 17 Dec 2004 Last revised: 6 Jun 2013
Date Written: April 2008
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
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