The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions
December 1999
Matthew J. Clayton and S. Abraham Ravid
ABSTRACT
This paper investigates how firms’ bidding behavior in various auctions is affected by capital structure. A theoretical
model is developed where the first price sealed bid and the English auction are examined. We find as debt levels
increase, firms tend to
decrease their bids. The lower bids give the competition incentives to decrease their bid as well. These results
are then investigated empirically using the recent FCC spectrum auctions. Consistent with the theoretical model,
larger debt levels of the
bidding firm and the competition tend to lead to lower bids. Additional determinants of bidding behavior in these
auctions are also analyzed.
Clayton: (212) 998-0309 mclayton@stern.nyu.edu
Ravid: (212) 998-0562 aravid@stern.nyu.edu
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