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Sale-Backs in Bankruptcy

32 Pages Posted: 11 Jan 2007  

Paul Povel

University of Houston - Department of Finance, C.T. Bauer College of Business

Rajdeep Singh

University of Minnesota - Twin Cities - Carlson School of Management

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Abstract

When bankrupt firms are sold, they are often repurchased by their former owner or manager. These insiders are by default better informed than outsiders about the true value of the firm or its assets, so other potential buyers must worry about overpaying if they win. The presence of insiders may thus have a chilling effect on the bidding. We ask how insiders should be treated in bankruptcy sales: Should they be allowed to submit bids? If so, under what conditions? We derive properties of an optimal sale procedure and show that it must be biased against insiders. Specifically, it should be harder for insiders to win with low bids than for outsiders. We show that the market tests that are routinely required in bankruptcy sales are sub-optimal, since they treat all potential buyers alike and forgo the benefits of biasing the procedure against insiders.

Keywords: Bankruptcy, Liquidation, Chapter 11, Section 363 Sales, Sale-Backs

JEL Classification: G33, G38

Suggested Citation

Povel, Paul and Singh, Rajdeep, Sale-Backs in Bankruptcy. Journal of Law, Economics and Organization, Vol. 23, No. 2, October 2007. Available at SSRN: https://ssrn.com/abstract=956211

Paul Povel (Contact Author)

University of Houston - Department of Finance, C.T. Bauer College of Business ( email )

University of Houston
334 Melcher Hall
Houston, TX 77204
United States
713-743-4759 (Phone)

HOME PAGE: http://www.bauer.uh.edu/povel

Rajdeep Singh

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1061 (Phone)
612-626-1335 (Fax)

HOME PAGE: http://umn.edu/~rajsingh

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