The winner's curse and bidder competition in acquisitions: evidence from failed bank auctions

Article Abstract:

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. (Reprinted by permission of the publisher.)

Banking industry, Auctions

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Preemptive bidding and the role of the medium of exchange in acquisitions

Article Abstract:

The medium of exchange in acquisitions is studied in a model where (i) the bidders' offers bring forth potential competition and (ii) targets and bidders are asymmetrically informed. In equilibrium, both securities and cash offers are observed. Securities have the advantage of inducing target management to make an efficient accept-reject decision. Cash has the advantage of serving, in equilibrium, to "preempt" competition by signaling a high valuation for the target. Implications concerning the medium of exchange of an offer, the probability of acceptance, the probability of competing bids, expected profits, and the costs of bidders are derived. (Reprinted by permission of the publisher.)

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Disclosure decisions by firms and the competition for price efficiency

Article Abstract:

This paper develops a model of the relationship between investment decisions by firms and the efficiency of the market prices of their securities. It is shown that more efficient security prices can lead to more efficient investment decisions. This provides firms with the incentive to increase price efficiency by voluntarily disclosing information about the firm. Disclosure decisions are studied. It is shown that firms may expend more resources on disclosure than is socially optimal. This is in contrast to the concern implicit in mandatory disclosure rules that firms will expend too few resources on disclosure. (Reprinted by permission of the publisher.)

Management, Investments, Financial disclosure

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