We test for fire-sale tendencies in automatic bankruptcy auctions. We find evidence consistent with fire-sale discounts when the auction leads to piecemeal liquidation, but not when the bankrupt firm is acquired as a going concern. Neither industry-wide distress nor the industry affiliation of the buyer affect prices in going-concern sales. Bids are often structured as leveraged buyouts, which relaxes liquidity constraints and reduces bidder underinvestment incentives in the presence of debt overhang. Prices in “prepack” auctions (sales agreements negotiated prior to bankruptcy filing) are on average lower than for in-auction going-concern sales, suggesting that prepacks may help preempt excessive liquidation when the auction is expected to be illiquid. Prepack targets have a greater industry-adjusted probability of refiling for bankruptcy, indicating that liquidation preemption is a risky strategy.

As argued by Jensen (1993), the primary tasks of a firm’s board of directors are to advise, hire, fire and determine the level and form of managerial compensation. Managerial pay can be structured as part cash and in part be tied to a performance index, such as corporate earnings or the firm’s stock price. The latter effectively aligns the interest of managers with those of stockholders, which in turn reduces agency problems related to free cash flow, managerial time horizons and effort levels. At the same time, stock-based compensation increases managerial exposure to non-diversifiable risk, which may cause risk-averse managers to underinvest in risky projects. The trade-off between the benefits of managerial incentive alignment and the cost of underinvestment is largely an empirical issue, and the widespread observation that managerial compensation is primarily paid in cash 1 suggests that managerial risk aversion weighs heavily or that boards generally resort to substitute monitoring mechanisms. The paper by Angbazo and Narayanan (1997) is part of a rapidly growing empirical literature attempting to identify important cross-sectional determinants

This paper provides some first, large-sample evidence on the Swedish auction bankruptcy system. Compared to U.S. Chapter 11 cases, the small-firm bankruptcy auctions examined here are substantially quicker, have lower costs, and avoid deviations from absolute priority. Three-quarters of the firms are auctioned as going concerns, which is similar to Chapter 11 survival rates. Moreover, based on market values, creditors in going-concern auctions recover a similar fraction of face value as creditors of much larger firms in Chapter 11 reorganizations. The evidence presented here suggests that the auction bankruptcy system is a surprisingly efficient restructuring mechanism for small firms.

Extant literature shows that IPO first-day returns are correlated with market returns preceding the issue. We propose a rational explanation for this puzzling predictability by adding a public signal to Benveniste and Spindt (1989)’s information-based framework. A novel result of our model is that the compensation required by investors to truthfully reveal their information decreases with the public signal. This “incentive effect” receives strong empirical support in a sample of 6300 IPOs in 1983–2012. Controlling for the incentive effect, the positive relation between initial returns and pre-issue market returns disappears for top-tier underwriters, where the order book is held to be most informative, effectively resolving the predictability puzzle.

Swedish bankruptcy filing automatically terminates the employment of the chief executive officer (CEO) and triggers an auction of the firm. Critics of this system warn of excessive shareholder risk-shifting incentives prior to filing. We argue that private benefits of control induce managerial conservatism that may override shareholder risk-shifting incentives. By investing conservatively, the CEO increases the joint probability that the auction results in a going-concern sale and that the CEO is rehired. This uniquely implies that the rehiring probability is increasing in private control benefits, which our empirical results support. We also find that buyers in the auction screen on CEO quality. Overall, labor market discipline is dramatic, as filing CEOs suffer large income losses relative to CEOs of matched, non-bankrupt firms. Firms emerging from auction bankruptcy appear healthy as they typically go on to perform at par with industry rivals. JEL classification: G33; G34

Corporate bonds include restrictive covenants that may prevent firms from pursuing valuable growth opportunities ex post and are virtually impossible to renegotiate. We study a common but little-known contractual provision—the defeasance option—which allows issuers to immediately remove all covenants without retiring the bond. Our theoretical model predicts, and our empirical analysis confirms, that defeasance inclusion is more likely when covenants are numerous and issuers face financial constraints, uncertainty, and growth opportunities. We also show that investors require lower yields when defeasance is included in noncallable bonds, and higher yields in fixed-price callable bonds, where it raises call risk.

Private equity (PE) managers are required to invest their own money in the funds they manage. We examine the incentive effects of this ownership on the delegated acquisition decision. A simple model shows that PE managers select less risky firms and use more debt, the higher their ownership. We test these predictions for a sample of Norwegian PE funds, using managers’ wealth to capture their relative risk aversion. As predicted, the target company’s cash-flow risk decreases and leverage increases with the manager’s ownership scaled by wealth. Moreover, the overall portfolio risk decreases with ownership, mitigating widespread concerns about excessive risk-taking.

We present unique empirical tests for auction 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. However, we argue that the bank may increase its expected revenue by financing a bidder in return for a joint bid strategy, and we show that 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.

We present large sample evidence on the performance of domestic and U.S. (foreign) bid? der firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announce? ment returns are, on average, greatest for offers involving stock payment and for the bid? ders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.

The more the target knows about the bidder, the more difficult is paying the target with overpriced bidder shares. Thus, when bidders are opportunistic, the fraction of stock in the deal payment will be lower for better informed targets. We test this intuitive prediction against the alternative that stock payments primarily reflect bidder concerns with target adverse selection, which implies a greater fraction of stock in the deal payment for better informed targets. Discriminating between these two mutually exclusive and nested predictions requires measures of target information about the bidder but not of market mispricing. We find that public bidders systematically use more stock in the payment when the target knows more about the bidder. Tests exploiting exogenous variation in bidder market-to-book ratios also fail to support bidder opportunism. Finally, greater potential competition from private bidders is associated with greater propensity for public bidders to pay in cash.