Auctions with Endogenous Initiation

We study initiation of takeover auctions by potential buyers and the seller. A bidder's indication of interest reveals that she is optimistic about the target. If bidders' values have a substantial common component, as in takeover battles between financial bidders, this effect disincentivizes bidders from indicating interest, and auctions are seller-initiated. Conversely, in private-value auctions, such as battles between strategic bidders, equilibria can feature both seller- and bidder-initiated auctions, with the likelihood of the latter decreasing in commonality of values and the probability of a forced sale by the seller. We also relate initiation to bids and auction outcomes.     

Multiple Unit Auctions and Short Squeezes

This article develops a theory of multiunit auctions where shortsqueezes can occur in the secondary market. Both uniform anddiscriminatory auctions are studied and bidders can submit multiplebids. We show that bidders with short and long preauction positionshave different valuations in an otherwise common value setting.Discriminatory auctions lead to more short squeezing and higherrevenue than uniform auctions, ceteris paribus. Asymptotically,as the auction size approaches infinity, the two formats leadto equivalent outcomes. Shorts employ more aggressive equilibriumbidding strategies. Most longs strategically choose to be passive.Free riding on a squeeze by small, long players has no impacton these results, but affects revenue in discriminatory auctions.     

Land Auctions with Budget Constraints

This paper tests for the effects of financial constraints on open-bid English land auction prices and bids. It is argued that bidders’ ability to pay, taken as capital resources and/or capital budget constraints, influence bids and final auction prices. While high capital resource developers may elect to bid more than optimal to win auctions, or bidders may elect to pool resources in joint bidding, budget constraints imposed by firm-specific financial variables on the other hand are expected to restrict bids. Land auction data in Hong Kong are used to test systematically these predictions. It is found that a firm’s age, the number of winners in a joint bid, and firm status in the market are positively related to prices, all factors which may be attributed to a firm’s ability to finance the auction price. Firm size, internal funds, financing cost, debt capacity and existing capital expenditure are also shown to affect bids submitted in land auctions: firm size and internal funds are positively related to bid prices; while constrained debt capacity, financing cost and existing capital expenditure lower bids. The results are consistent with predictions that a firm’s financial constraints, and thus its effect on capital budgets, are relevant factors in predicting land auction outcomes. More generally, these findings confirm that similar financial factors that constrain corporate capital investment also influence directly acquisition of assets at auctions.     

Corporate Reorganizations and Non-Cash Auctions

This paper extends the theory of non-cash auctions by considering the revenue and efficiency of using different securities. Research on bankruptcy and privatization suggests using non-cash auctions to increase cash-constrained bidder participation. We examine this proposal and demonstrate that securities may lead to higher revenue. However, bidders pool unless bids include debt,which results in possible repossession by the seller. This suggests all-equity outcomes are unlikely and explains the high debt of reorganized firms. Securities also inefficiently determine bidders' incentive contracts and the firm's capital structure. Therefore, we recommend a new cash auction for an incentive contract.     

Theory and Behavior of Multiple Unit Discriminative Auctions

This paper reports the results of controlled experiments designed to test the Harris-Raviv generalization of the Vickrey theory of bidding in multiple unit discriminative auctions. The paper also discusses further development of the theory—in a way suggested by the experimental results—to include bidders with distinct risk preferences.     

Strategic and Financial Bidders in Takeover Auctions

Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature, poorly performing companies. We also find that (i) valuations of different strategic bidders are more dispersed and (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.     

Underpricing and Market Power in Uniform Price Auctions

In uniform auctions, buyers choose demand schedules as strategiesand pay the same "market clearing" price for units awarded.Despite the widespread use of these auctions, the extant theoryshows that they are susceptible to arbitrarily large underpricing.We make a realistic modification to the theory by letting prices,quantities, and bids be discrete. We show that underpricingcan be made arbitrarily small by choosing a sufficiently smallprice tick size and a sufficiently large quantity multiple.We also show how one might improve revenues by modifying theallocation rule. A trivial change in the design can have a dramaticimpact on prices. Our conclusions are robust to bidders beingcapacity constrained. Finally, we examine supply uncertaintyrobust equilibria.     

The U.S. Treasury Buyback Auctions: The Cost of Retiring Illiquid Bonds

We study an important recent series of buyback auctions conducted by the U.S. Treasury in retiring $67.5 billion of its illiquid off‐the‐run debt. The Treasury was successful in buying back large amounts of illiquid debt while suffering only a small market‐impact cost. The Treasury included the most‐illiquid bonds more frequently in the auctions, but tended to buy back the least‐illiquid of these bonds. Although the Treasury had the option to cherry pick from among the bonds offered, we find that the Treasury was actually penalized for being spread too thinly in the buybacks.     

Auctions in bankruptcy

This paper examines whether mandatory auctions promote the efficient restructuring of distressed firms relative to a reorganization-based bankruptcy system such as Chapter 11. Under a mandatory auction system, aggressive bidding by a coalition of incumbent management and pre-bankruptcy creditors may deter outside bidders, may result in the coalition paying more than its valuation to acquire the firm, and may result in assets remaining in a lower value use. In a reorganization-based bankruptcy system, management's voluntary choice to seek an auction conveys information about the coalition's valuation, which facilitates competition. Our model shows that a reorganization-based bankruptcy system that encourages, but does not mandate auctions, can actually increase the likelihood that an outside bidder enters and the assets of the bankrupt firm are redeployed.     

New Measures for Inflation Uncertainty and Disagreement from Treasury Auctions: Alternative to Surveys

In this article, we propose a novel methodology to construct new uncertainty and disagreement measures for the long-term inflation rate with the use of micro data of Treasury auctions. We employ individual bids submitted in Treasury auctions for nominal and inflation indexed bonds. We argue that these newly formed indicators do not have the problems associated with the survey and market-based uncertainty and disagreement measures. We also focus on the interactions of our proposed measures for inflation rate by comparing the measures commonly used in the literature. The findings of this article are believed to enhance the effectiveness of policy-making by introducing new proxies for crucial economic variables and also by providing the opportunity for other emerging economies with inadequate surveys to construct historical uncertainty and disagreement measures for inflation rates.     

Auctions of divisible goods: on the rationale for the treasury experiment

We compare a sealed-bid uniform-price auction (the Treasury'sexperimental format) with a sealed bid discriminatory auction(the Treasury's format heretofore), assuming the good is perfectlydivisible. We show that the auction theory that prompted theexperiment, which assumes single-unit demands, does not adequatelydescribe the bidding game for Treasury securities. Collusivestrategies are self-enforcing in uniform-price divisible-goodauctions. In these equilibria, the seller's expected revenueis lower than in equilibria of discriminatory auctions.     

Does Joint Bidding Reduce Competition? Evidence from Hong Kong Land Auctions

This paper analyses firms’ bidding behavior in auctions for development land in Hong Kong. The real estate market in Hong Kong is considered to be oligopolistic as it is dominated by a few top real estate firms, which have strong financial strength/development capacity and large land banks. Joint bidding is used by other real estate firms (“large” firms) to pool resources/capital in order to compete with the top firms. We test whether joint bidding increases or decreases the level of competition in land auctions, using land auction data in Hong Kong from 1991 to 2011. We find that large real estate firms are more likely to be successful than top firms at auctions when bidding jointly. However, joint bidding/winning does not harm competition as reflected by the number of bids, bids per bidder and number of bidders. Land prices also increase significantly in auctions won by joint bidders or alliances of large developers. Our results suggest that joint bidding enhances competition by allowing large firms to act strategically by pooling their resources and act aggressively to compete with the top firms.

     

The Winner's Curse and Bidder Competition in Acquisitions: Evidence from Failed Bank Auctions

This study examines the effect of bidder competition in acquisitions. We use predictions from auction theory to test whether acquirers of failed banks overpay (the “winner's curse”) when bidding in FDIC sealed-bid purchase and assumption (P&A) transactions (auctions). The empirical results indicate that winning bids tend to increase as the number of competitors increases, as predicted by theory. We also find that bid levels of all bidders increase with increased competition, which is consistent with bidders' failing to adjust for the winner's curse in a common value auction setting. However, additional tests using winning bids only are consistent with both a common value and a private values model, so this result should be interpreted with caution.     

An analysis of FDIC failed bank auctions

This paper examines whether the sales mechanism used by the FDIC in failed bank auctions results in wealth transfers from the FDIC to the acquiring banks. We test this hypothesis by examining the returns to winning bidders in FDIC auctions. We find positive abnormal returns to these bidders. More importantly, we find a negative and significant relation between the returns to winning bidders and the number of bidders participating in the auction. This evidence suggests that the FDIC's auction procedures do generate wealth transfers.     

Repo Auctions and the Market for Liquidity

What is the nature of imperfections in the market for liquidity? Studying bidder level data from European Central Bank (ECB) repo auctions, we find that this market appears to be informationally efficient in the sense that participants do not have private information about future short‐term rates. However, auction allocations affect banks' subsequent behavior in a way that is consistent with a degree of allocational and operational inefficiency. Also, large bidders appear to have better access to the interbank market than small ones. Finally, the evidence suggests that the ECB uses collateral haircuts that do not equilibrate opportunity costs.     

The Impact of Capacity Costs on Bidding Strategies in Procurement Auctions

This paper analyzes the impact of capacity costs on bidding strategies of firms participating in procurement auctions. More efficient firms will invest in advance due to their high probability of winning the auction while less efficient bidders prefer to wait with their investments until the outcome of the auction is known. However, in equilibrium both types of firms include a coverage for their investment costs in their bids and therefore adopt a full cost pricing policy. This revised version was published online in November 2006 with corrections to the Cover Date.     

Auctions and information acquisition: sealed bid or dynamic formats?

The value of an asset is generally not known a priori, and it requires costly investments to be discovered. In such contexts with endogenous information acquisition, which selling procedure generates more revenues? We show that dynamic formats, such as ascending‐price or multistage auctions, perform better than their static counterpart. This is because dynamic formats allow bidders to observe the number of competitors left throughout the selling procedure. Thus, even if competition appears strong ex ante, it may turn out to be weak along the dynamic format, thereby making the option to acquire information valuable. This very possibility also induces the bidders to stay longer in the auction, just to learn about the state of competition. Both effects boost revenues, and our analysis provides a rationale for using dynamic formats rather than sealed‐bid ones.     

Strategic bidding in multi‐unit auctions with capacity constrained bidders: the New York capacity market

This article employs a simple model to describe bidding behavior in multi‐unit uniform price procurement auctions when firms are capacity constrained. Using data from the New York City procurement auctions for power generating capacity, I find that firms use simple bidding strategies to coordinate on an equilibrium that extracts high rents for all bidders. I show theoretically and empirically that the largest bidder submits the auction clearing bid. All other bidders submit inframarginal bids that are low enough to not be profitably undercut. Inframarginal bidders decrease their bids as the pivotal firm's capacities and its profits of undercutting increase.     

Auctions with selective entry and risk averse bidders: theory and evidence

We study auctions with selective entry and risk averse bidders. Our model accounts for risk averse bidders' endogenous participation decision and thus encompasses the existing entry models. We establish entry and bidding equilibrium in first‐price auction and ascending auction mechanisms and show that bidders' entry behavior differs between these two mechanisms with different forms of risk aversion. Our approach provides testable implications of risk aversion in terms of entry behavior. We analyze a timber auction data set and propose a simple test for the form of bidders' risk aversion based on our model implications.     

The overconfidence of investors in the primary market

We analyze the investment performance of 6993 investors bidding in 77 discriminatory IPO auctions in the Taiwan stock market between January 1996 and April 2000, and find that frequent bidders in these auctions have lower returns than infrequent bidders. The frequent bidders bid too aggressively and evaluate the IPO firms too optimistically, resulting in inferior performance. Despite being quite successful in their first few auction bids, the returns for frequent investors are gradually reduced in subsequent auctions. The multivariate model and the analysis of the possibility of perverse incentives of brokerage firms suggest that our findings cannot be explained by rational hypotheses, whereas in contrast, the theories on overconfidence and self-attribution bias can explain the increase in bidding frequency and the deterioration in return performance for bidders in IPO auctions.