Matthew J Clayton, S. Abraham Ravid
ABSTRACT
This paper investigates how firm bidding behavior in various auctions
is affected by capital structure. A theoretical model is developed where
the first price sealed bid and second price sealed bid auctions are examined
in situations where the firms are competing for an asset with either a
common value or a private value. Findings include that in the presence
of exogenous and symmetric debt, the revenue equivalence theorem no longer
holds, and hence, there may be an optimal auction or set of auctions that
yield the maximum expected revenue to the seller. In addition, as debt
level increase, firms will tend to decrease their bids. The lower bid function
gives the competition incentives to decrease their bid as well. Thus, we
would expect a firm's bid to be a function of both its own debt level and
the debt level of the competition, and an increase in either should result
in a decrease in the firm's bid. The empirical part of the paper applies
these ideas to recent FCC auctions. The evidence is consistent with the
theoretical model. Debt levels of the bidding firm and the competition
are found to be determinants of the highest bid a firm is willing to submit
in the auction, and higher debt levels (by the firm or its competition)
lead to lower bids.
Subject: Corporate Finance/Capital Structure (Theoretical and Empirical)
Clayton: (212) 998-0309 mclayton@stern.nyu.edu
Ravid: (973) 353-5540
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