Sale-backs in bankruptcy

Paul Povel, Raj Singh

Research output: Contribution to journalArticle

6 Scopus citations

Abstract

When bankrupt firms are sold, they are often repurchased by their former owner or manager. These insiders are by default better informed than outsiders about the true value of the firm or its assets, so other potential buyers must worry about overpaying if they win. The presence of insiders may thus have a chilling effect on the bidding. We ask how insiders should be treated in bankruptcy sales: Should they be allowed to submit bids? If so, under what conditions? We derive properties of an optimal sale procedure and show that it must be biased against insiders. Specifically, it should be harder for insiders to win with low bids than for outsiders. We show that the "market tests" that are routinely required in bankruptcy sales are suboptimal since they treat all potential buyers alike and forgo the benefits of biasing the procedure against insiders.

Original languageEnglish (US)
Pages (from-to)710-730
Number of pages21
JournalJournal of Law, Economics, and Organization
Volume23
Issue number3
DOIs
StatePublished - Oct 1 2007

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